Compensation and benefits

Compensation and benefits comprise the total rewards package that an employee receives for performing a job. Compensation is considered direct pay, since it is the amount of money the employee receives. Benefits are indirect pay, since they are monetary equivalents that can be converted later into cash or used to pay for selected expenses. For every dollar paid in compensation, the CHAMBER OF COMMERCE estimates that 39–40 percent is spent for indirect compensation, leaving 60–61 percent for direct compensation. These are composite averages; individual companies and specific situations may vary considerably. Three factors influence the average pay for the organization and each employee’s specific pay: (1) competitive pressures from forces outside the organization, (2) the company’s desire to compensate all of its employees fairly and equitably, and (3) what the individual employee brings to the organization. The primary external pressure affecting pay rates comes from other companies within the marketplace (the geographical region in which companies recruit applicants). Each employer is in competition with other companies for applicants of similar qualifications. The competition may group employees within common industries or by level of knowledge, skills, and abilities. Through area surveys, companies identify what the collective marketplace pays and set their pay scales accordingly. Companies can pay less than others, more than others, or at the market average. The most common philosophy is to pay competitively (e.g., “at” the market scale), but a primary factor is the firm’s ability to pay. Companies that can pay more than market scale are likely to be able to generate a larger pool of higher-qualified applicants, which translates to less required training time and higher operating efficiencies. Companies that pay less than market scale may be recent entrepreneurial start-up firms with limited CAPITAL. Sometimes these firms offer stock ownership incentives to attract highly qualified applicants. Compensation is directly linked the market’s DEMAND for the products or services offered and the profits the company earns. Every employee wants to be paid fairly in comparison with other employees. However, before pay rates are considered, each position needs to be studied and compared with other positions to assure an accurate hierarchy of jobs. This process assures internal equity, which is the second force that strongly shapes the company’s compensation philosophy. Assuring internal equity requires that the company perform a thorough task analysis of each position. Task analyses look at the actual work performed by the job incumbent (job content) and the physical environment in which the work is performed (job context). In addition, the education, experience, knowledge, skills, and abilities of the desired job incumbent are identified. Common tasks are grouped and written into responsibility statements. Responsibility statements, budgetary responsibilities, reporting relationships, and a position summary statement are the bases for the job description. Care must be taken to ensure that essential job duties are accurately identified. (See EMPLOYMENT for additional information about this concern.) The job descriptions are then either compared to each other or to a predetermined measuring technique to determine their level of importance to the company. Job evaluations lead to the creation of a job hierarchy in which positions are listed in order of importance from most important to least important. Frequently positions are then grouped into labor (or salary) grades, and wage ranges are assigned using market survey data. Individual considerations that are unique to each employee influence the actual salary or wage paid to the employee after the monetary range is defined. Individual salary determinants include the desire of the employer to hire the candidate, the level of performance as reflected by formal PERFORMANCE APPRAISALs, negotiating strength during the employment process and sometimes after employment, and SUPPLY and demand. Supply and demand recognizes the prevalence of applicants with unique knowledge and experiences in the recruiting area and the extent that the company needs someone with those unique capabilities. A major portion of the employer’s compensation expenses is allocated to pay for benefits that the company is either required to provide or offers voluntarily. Benefits that are voluntarily offered by employers are divided into three primary categories: (1) paid time off, (2) group INSURANCE, and (3) capital accumulation. Paid time off includes vacations and holidays but also may include work breaks, clean-up time at the end of the shift, sick pay, and personal time. Group insurance frequently includes medical, dental, life, and disability coverage. Capital accumulation includes the employers’ portion of SOCIAL SECURITY payments and a wide variety of retirement benefit alternatives. Legally required benefits include Social Security, UNEMPLOYMENT insurance, WORKERS’ COMPENSATION, and, in many cases, time off to attend to family medical needs. In a few states, employers are required to offer personal disability benefits, but this varies widely from state to state.
See also EMPLOYEE BENEFITS.
John B. Abbott