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Copyright © 2015 by HRCP, L.C.
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Compensation Compensation and Benefitsand Benefits
PHR 19% - SPHR 13%PHR 19% - SPHR 13%
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Why People Work
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Compensation Motivating
Legal
AdequateEquitable
Secure
Cost/benefit effective
Strategic Objectives of Compensation
Compensation Objectives
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Wage Level Decision
How much should we pay our employees? To attract an adequate supply of labor. To keep present employees reasonably satisfied
with their compensation. To avoid costly turnover.
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Factors Influencing Wage Level Most significant factors influencing wage levels:
Organizational Size
Unionization
Productivity (Ability to Pay)
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Wage Surveys
Four conditions
1.Reciprocity2.Anonymity3.Low Cost4.Timeliness
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Wage Structure Decision How much should each job be paid relative to other jobs
in the organization? Based on the job demands, not on how well the job
holder performs. The wage structure must allow for individual variances
based on performance, experience, and seniority. The major objective of the wage-structure decision is to
provide equal pay for jobs of equal worth and an acceptable set of pay differentials for jobs of unequal worth.
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Job Evaluation The systematic approach of determining the relative
worth or value of each job in an organization. The purpose of job evaluation is to eliminate pay inequities and create a wage structure that identifies appropriate pay ranges for different jobs.
The relative worth of each job is established by identifying factors that define “worth” and by comparing the requirements of each job with these factors.
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Ranking Method
The simplest method of developing a wage structure is to have the job-evaluation committee rank the jobs from highest to lowest in value.Advantages of job-ranking method:It is the simplest of all the evaluation methods and it requires little time or paperwork.Disadvantages of job-ranking method:The differentials between the ranks are assumed to be equal when they usually are not.Evaluating each job as a whole is not conducive to a careful analysis and cannot provide an accurate measurement of worth.Difficult to use in organizations with large numbers of jobs.
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Classification/Grading Method
Job descriptions for each job are compared with a classification scheme that ranks the jobs in a hierarchy of job worth.Specifying a number of grades and writing broad descriptions of the types of jobs in each of the grades. Each job description is compared with the descriptions for the grades.The job grades range from high to low, and each grade has a verbal description and examples of the kinds of jobs that fit into it.Advantage: It standardizes the wages for similar jobs and maintains pay differentials between jobs within an extremely large organization.Disadvantage: Its stability makes it unresponsive to such factors as regional wage differences and labor-market variances.
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Point Method
The compensable factors of key jobs are used to develop the wage curve. Points are assigned to each factor, and the total points are associated with a specific pay level. The point method consists of the following steps:
1.Identify key jobs.
2.Identify job factors used to determine pay levels.
3.Weight the factors according to their contribution to the overall worth of the job.
4.Divide each job into degrees that range from high to low and assign points to each degree.
5.Reach a consensus about degree assignments.
6.Develop a wage curve using key jobs.
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Sample Chart
Compensable Factor
Weighted percentage Degree/Points
1 2 3 4 5
Skill (40%) 20 32 48 72 100
Responsibility (30%) 15 24 36 54 75
Effort (20%) 10 16 24 36 50
Working Conditions (10%) 2 8 12 18 25
Example:
Regrind Operator Compensable Factor Degree Points
Skill 3 48
Responsibility 2 24
Effort 4 36
Working Conditions 4 18
Total Points 126
Point Assignments for Four Compensable Factors
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X
Y
Pay $
Points
Wage Curve Based on 15 Key Jobs
Broadbanding
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Factor Comparison Method
1. Identify key (benchmark) jobs
2. Identify job factors
3. Rank jobs
4. Assign monetary amounts to each job on each
factor
5. Compare unique jobs with key jobs
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Hay Guide Chart Profile
The Hay Guide Chart-Profile Method is a job evaluation system that is basically a factor comparison system, although it is also very similar to the point method since it uses points. This method uses three compensable factors:• Know-how• Problem solving• Accountability
Because the compensable factors of the Hay Method are defined so broadly and generally, this system can be used for many different industries and many different jobs.
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Job Pricing
The process of placing a dollar value on the worth of a job is referred to as job pricing.
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Pay Grades
Labor grades
1 2 3 4
Points
5 6 7 8
Hourly wage
Maximum for labor grade 2
Starting wage for labor grade 2
Maximum
Trend line
Minimum limit line
Pay range
Red circle rate
Pay Grades Constructed Along the Wage Curve
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Compa-ratio
A compa-ratio is a number that is calculated by dividing a person’s wage rate by the midpoint of the pay range for that grade and multiplying it by 100. This number provides a standardized index for assessing how much people should be paid relative to the job they hold. People should have higher compa-ratios if they are higher performers or if they have more seniority. Comparisons between the compa-ratios of men versus women can test for evidence of gender discrimination. The compa-rations should be about the same unless one group has substantially more seniority or higher performance. Likewise, the average compa-ratio of one race should not be substantially different than the average compa-ratios of other races unless there are differences in seniority or performance.
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Pay Adjustments
Administrative problems may arise when the wage structure has to be adjusted due to inflation, legislation or internal changes within the organization, such as job redesign. What are some of the issues involved in adjusting the wage curve?
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Individual Pay Decision
• Performance: Performance differences are clearly the most reasonable and well-accepted justification for paying differential amounts.
• Experience: A common justification for giving some employees more money is that they have more experience.
• Seniority: Pay differentials based on seniority or length of service are found in many compensation systems.
• Potential: Occasionally, organizations pay higher than average wages to individuals who demonstrate outstanding potential.
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Pay Decisions
Pay decisions are controlled by two basic processes.
1. The design of the wage structure
2. The formal budgeting process
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Economic Factors that Effect Compensation
InflationInterest ratesIndustry competitionForeign competitionEconomic growthDemographic trends
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Demographic Trends
The labor market is primarily influenced by five demographic forces:
birthrates participation rates immigration education unemployment
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Unemployment Levels
How does an increase or decrease in unemployment rates influence a company's compensation system?
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Money & Motivation Theories
How is money viewed in the following theories?
Need Theory
Self-determination Theory
Expectancy Theory
Equity Theory
Goal Setting Theory
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Expectancy Theory
The basic idea of Expectancy Theory is that motivation is determined by the outcomes people expect to occur as a result of their actions.
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When Employees Believe that Pay is Inequitable1. People may alter their inputs. 2. People may alter their outcomes.3. People may cognitively distort their inputs or outcomes.4. People may distort the inputs or outcomes of others.5. People may change objects of comparison.6. People may leave the field.
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Pay for Performance
Financial incentives that are directly tied to productivity
Individual Group Company-wide incentive plans Some combination of all three.
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Merit Increase Guidelines : Fixed Increase or Discretionary Increase
Performance Rating*Expected Number of Employees
Fixed Increase Amount
orDiscretionary Increase
Range
Outstanding: Truly exceptional performance
1 in 10 12% 10-15%
Excellent: Constantly exceeds standards 2 in 10 8% 7-9%
Good: Occasionally exceeds standards
4 in 10 5% 4-6%
Average: Occasionally meets standards
2 in 10 3% 2-3%
Fair: Marginal performance 1 in 10 1% 0-1%
* Note to supervisors: This column shows the number of employees in a typical department who would normally be rated in each category.
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Salary Increase Matrix using the Compa-ratio Approach
PerformanceCompa-ratio
0.80 - 0.89 0.90 - 0.99 1.00 - 1.09 1.10 - 1.20
Outstanding 7.0 - 8.0 % 6.0 - 7.0 % 5.0 - 6.0 % 4.0 - 5.0 %
Above Average 5.0 - 6.0 % 4.0 - 5.0 % 3.5 - 4.5 % 3.0 - 4.0 %
Average 3.0 - 4.0 % 2.5 - 3.5 % 2.0 - 3.0 % 1.5 - 2.5 %
Below Average 1.0 - 2.0 % 0.8 - 1.8 % 0.6 - 1.6 % 0.4 - 1.4 %
Unsatisfactory 0 % 0 % 0 % 0 %
Compa-ratio
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$
Number of units produced
Straight piecework: 25 cents/unit
Taylor’s differential piece-rate plan: 22 cents/unit if less than standard; 27 cents/unit if more than standard
Standard
A Comparison of Straight Piecework & F.W. Taylor’s Differential Piece-Rate Plan
Piece Rate Plans
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The Standard Hour Plan
Workers are paid an hourly wage, but the hour
is measured in units produced rather than in
minutes.
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The Halsey Premium Plan
Workers receive a guaranteed hourly wage plus a percentage (33 percent was recommended) of the wage for any time saved. The actual production standards are determined by past performance rather than by time-and-motion studies.
If a worker is paid $12.00 per hour and the task usually requires eight hours, the worker receives an additional $4.00 per hour for each hour saved under eight hours.
A worker who completes an eight-hour task in seven hours receives a $4.00 premium.
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Restriction of Output
Soldiering, gold bricking, or rate restriction Establishes low level of performance as a group
norm. Individuals within the group police each other’s
behavior and provide negative sanctions and peer group pressure on individuals who exceed the group standard.
Supervisors can avoid restriction of output by confronting groups with data that show how increased production reaps employee financial rewards and the success of the organization.
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Units per hour
60 Standard
56 Group norm
Starting date Two and one-half weeks later
Illustration of Group Norms Restricting Productivity: Individual Productivity of a New Employee
Restriction of Output
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Individual Incentive Plans
Piecework and the standard hour plans -individuals control their own rates of performance, independent, and productivity measurable.
Commission – independent, sales measureable Merit pay - supervisor subjectively evaluates the
performance and decides which ones are better performers.
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Skill and Knowledge Based Pay
Reward employees for their ability to perform an array of related tasks or skills rather than for the actual work
performed.
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Skill/Knowledge Based Pay
Performance Level
Skill Level Marginal AcceptableAbove
StandardExceptional
1 $8.00 8.36 8.75 9.15
2 8.48 8.87 9.30 9.72
3 9.00 9.42 9.87 10.33
4 9.55 10.00 10.50 11.00
Skill x Performance Pay Matrix Hourly Rates of Pay
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Differential Pay
overtime
shift pay
hazard pay
on-call pay
call-back pay
geographic differentials
weekend and holiday pay
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Group Incentives
Group incentive systems are preferred when:• individuals are required to work together, • group productivity can be determined more
easily than individual productivity• high level of cooperation is required• groups are cohesive.
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Profit Sharing
Cash
Provides greater motivation because employees immediately see that their efforts have created greater compensation
Deferred Not taxed immediately Money invested Will be taxed at a later
time Help develop retirement
plan
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Gainsharing
Scanlon Plans
Rucker Plans
Improshare
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Employee Stock Ownership Plan An ESOP is formed by creating a trust, into
which a company makes tax deductible contributions of cash or stock.
The proceeds are used to buy shares of the company’s stock which are allocated to individual employee accounts.
Employees who have an ownership interest in a firm are more concerned about the efficiency and profitability of the firm than employees who do not share in the ownership.
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Job AClerical position in a credit union
Job BMetal worker in a metal shop
Job CSales supervisor at a used car lot
Profit sharing
Individual incentive
Base pay
10%
5%
85%
Group bonus
Base pay (determined partly by individual performance)
20%
80%
Profit sharing
Group incentive
Individual incentive
Base pay
15%
15%
40%
30%
Base Pay and Incentive Pay Balance
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Discussion Question
In fine tuning an incentive system, what problems would occur if excessive weight were placed on:
- individual incentives?- on group incentives? - on profit sharing? - on base salary?
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Stock Options
A stock option is the right to buy a company’s stock at a certain price over a certain period of time, usually ten years.
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FASB
Financial Accounting Standards Board – 2006
Must report the fair value of their stock options as
an expense on their financial statements for tax
purposes.
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Employee BenefitPrograms
Part 2
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Mandatory Wage Replacement Benefits1.Social Security 2.Workers’ Compensation – Unit 6
3.Unemployment Compensation – Unit 6
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Social Security Benefits
1. Old age or disability benefits
2. Benefits for dependents of retired, disabled, or deceased workers
3. Lump-sum death benefits
4. Medicare
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Pension Plans
Defined Benefit Pension Plan
Defined Contribution Pension Plan
A pension is the income individuals receive during retirement as a deferred payment for past services rendered.
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Individual Savings PlansThe most popular savings
plans include:
• 401 (k) Plans• 403 (b) Plan• IRAs• SEPs• Keogh (H.R. 10)• SIMPLE• Roth IRAs• DB/k
Deferred accounts that are approved by the IRS, called qualified plans, enjoy special tax considerations.
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Pension Protection Act Allows employers to
automatically enroll employees in a 401(k) plan.
Requires employers to send timely notices to employees regarding their right to elect different investments. Notice must be provided at least 30 days before the participants are eligible to elect new investments for contributions automatically invested in employer stock.
Created the DB/k, is available only to employers with fewer than 500 employees starting in 2010.
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Health Insurance
Medical InsuranceDental InsuranceDependent Care
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Accidental Death or Dismemberment InsuranceAccidents and illnesses that result in death are the most serious personal losses, but a permanent disability can also create a serious financial strain.
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Life Insurance
Income Replacement
Life insurance and income-continuation plans help to alleviate difficulties.
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PAID FOR TIME NOT WORKED Paid holidays
Paid vacations
Paid personal leave
Union activities
Reporting time
Sabbatical leaves
Paid funeral leave
Jury duty
Military Leave
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Recognition Awards
Organizations use a variety of recognition programs to influence the attitudes and behaviors of employees.
• cash awards• stock• jewelry• clothing• theater tickets• dinner for two• lunch• parties• time-off from work• plaques/pictures
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Health Care Benefits
Maximum freedom of choice
Minimum cost control
Minimum freedom of choice
Maximum cost control
Fee for Service
Preferred Provider
organizationPoint of service
Health maintenance organization
Group health
cooperatives
Managed Health Care Options Freedom of Choice versus Cost Control
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HMO
The cost is fixed regardless of the frequency, extent, or kind of health service that has been furnished; and the cost is fixed under a community rating system or a group rate based on an estimate of how much it is likely to cost to provide services to the employee group. Employees can obtain basic health services as frequently as they need them at a fixed monthly cost.
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Consumer-Directed Health Care
Programs that have been approved by Congress and qualify for special tax treatment.
Flexible Benefit Plans
Flexible Spending Arrangements (FSA)
Health Reimbursement Arrangements (HRA)
Health Savings Accounts (HSA)
Private Health Exchange
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Flexible Benefits
Advantages Select benefits that are
for their situations - age, marital status, number of dependents, and physical health.
Employees are more satisfied with the program.
Better informed about the benefits they have.
Disadvantages Administrative
procedures are complex. Flexibility is limited by the
tax laws; employees may receive cash refunds, but they are treated as taxable income.
Cost of benefits may increase.
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Employee Benefits Philosophy
1. Sharing the risks of accidents and illness.
2. Forced savings for retirement or bad times.
3. Sharing the costs of special services.
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Cost Benefit Analysis & Cost ManagementMethods used for measuring and analyzing the costs of employee benefit plans:
• Annual cost method• Cost per employee per year• Percent of payroll• Cents-per-hour
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Employee Retirement Income and Security Act
Under ERISA, welfare benefit plans generally include any plan, fund, or program maintained by an employer.
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ERISA Covered Programs
Medical, surgical, or hospital care.
Reimbursement in event of accidents, disability, or death.
Vacation and sick leave benefits.
Unemployment benefits, such as severance pay.
Apprenticeship or training programs.
Day care.
Scholarship funds.
Prepaid legal services.
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Communicating BenefitPrograms
Employers can use a variety of communication strategies, including employee handbooks, online benefits portals, agent enrollment sessions, employee newsletters, lunch-and-learn sessions, customized benefits booklets, and frequently-asked-questions materials.
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Summary Plan Document
Summary Plan Document
Employers are required to have a Summary Plan Document (SPD) that
describes each welfare benefit offered by the
employer.
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Compensation Laws
Davis-Bacon Act (Prevailing Wage Law)
Requires organizations holding federal contracts to pay laborers and mechanics the prevailing wages of the locality in which the work is performed.
Overtime must be paid at one-and-one half times the local rate.
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Compensation Laws
Copeland Act & Anti-Kickback Law
The Copeland Act was passed during the Great Depression to prohibit the unfair treatment of employees who needed jobs so desperately that employers could take advantage of them, i.e., deductions that a federal contractor can make from employees’ wages. Contractors have to demonstrate that their payroll deductions are proper, and they have to file weekly statements showing the wages actually paid and the deductions made.
The Anti-Kickback Law was passed in 1948 as an amendment to the Copeland Act, making it illegal for a federal contractor to threaten or otherwise induce employees to give part of their rightful compensation to the contractor.
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Compensation Laws
Walsh-Healey Act (Public Contracts Act)
Extended the Davis-Bacon Act to non-construction federal contractors.
Sets basic labor standards and minimum-wage rates for all work done under a federal contract exceeding $10,000. The minimum-wage standards are established by the secretary of labor rather than local prevailing rates.
The act requires that overtime be paid at the rate of one-and-one-half times the base rate for work exceeding 40 hours per week.
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Compensation Laws
Fair Labor Standards Act (Wage & Hour Law)
FLSA sets minimum wage standards, overtime pay standards, and child labor restrictions.
Under the FLSA, what determines whether an employee is exempt or non-exempt?
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Compensation Laws
Overtime Provisions
Employees receive one-and-one-half times the regular rate of pay for all hours worked in excess of 40 during a given week.
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Overtime Calculations withBonus
EE earns $10/hr for 48-hour week, receives $24 weekly production bonus & gets 8 hours of overtime pay based on rate that includes bonus.
EE really earns $10.50/hr ($10/hr base pay plus $24 bonus divided by 48 hours required to earn it or 50¢/hr) & an overtime rate of $15.75. The EE’s earnings for that week would be:
Regular time 40 x 10.50 = $420.00Overtime 8 x 15.75 = 126.00Weekly earnings $546.00
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Overtime Calculations Paidon Piece Rate
Hourly rate of pay for those paid on a piece rate basis is calculated by dividing money they earned by number of hours they spent earning it.
Example: worker works 50 hrs & produces 100 pieces at rate of $4/piece would have an hourly rate of pay of $8 (100 pieces times $4 per piece equals $400, divided by 50 hrs equals $8/hr). This worker’s earnings for that week would be:
Regular time 40 hours x $8.00 = $320.00Overtime 10 hours x $12.00 = 120.00Weekly earnings $440.00
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Minimum Wage
The purpose of minimum wage standards are to ensure a living wage for all laborers and to reduce poverty. The laws are intended to help low-income families, females, and minority workers.
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Fair Labor Standards Act
Record Keeping
The FLSA requires employers to keep records of wages, hours, and other related items.
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Equal Pay Act
The Equal Pay Act prohibits employers from paying members of one sex less than members of the opposite sex for performing equal work.
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Equal Pay Act
Permissible Wage Differences• A bona fide seniority system, where wages or
salaries are based on length of service.• A merit pay system where pay is determined by
legitimate performance measures.• A system that measures earnings by quantity or
quality of production.• A differential based on any factor other than
gender, such as differentials between regular and temporary employees or geographic differences.
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Comparable Worth Controversy
Should employers be required to establish the value or worth of all jobs?
A point method of job evaluation can eliminate pay disparity.
Several comparable worth cases have gone before the courts. The courts recognize the theory of comparable worth but have not been willing to require employers to adopt common criteria for all jobs.
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Pregnancy Discrimination in Employment Act
Defines discrimination because of sex to include “pregnancy, childbirth, or related medical conditions.”
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FMLA
Family and Medical Leave Act
FMLA entitles eligible employees to take up to 12 weeks of unpaid leave each year for specified family and
medical reasons.
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National Defense Authorization Act Extended FMLA by providing 12 weeks leave for family
members impacted by active military duty.
Plus 26 weeks of military caregiver leave for the families of service members injured in the line of duty.
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HIPAA
Health Insurance Portability & Accountability Act
HIPAA provides greater portability in health care coverage and limits the exclusions for preexisting conditions and places other restrictions on an insurance carrier’s ability to exclude a worker form insurance coverage.
What are the major provisions of HIPAA?
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Affordable Care ActThe Patient Protection and Affordable Care Act (PPACA), commonly called the Affordable Care Act (ACA) or colloquially Obamacare, is a United States federal statute signed into law by President Barack Obama on March 23, 2010
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Small Business Job Protection Act
The Small Business Job Protection Act raised the minimum wage and made significant changes to pension plans.
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The Federal Wage Garnishment Act Restricts the amount of an
employee’s disposable earnings that can be deducted to pay a garnishment. The law limits the amount that can be garnished in one week to not more than 25 percent of an employee’s disposable weekly earnings, or the amount that is 30 times the FLSA minimum wage-whichever is less.
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ERISA Terms to Know
Employee Retirement Income Security Act
Designed to ensure that employees covered under
private pension plans & employee welfare benefit plans would receive the
benefits promised.
• Eligibility • Vesting• Portability• Funding• Fiduciary • Reporting• Disclosure• Compliance testing• Contributory• Noncontributory
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ERISA Reports
Summary plan description
Announcements of material modifications
Summary annual report
Plan document Annual report
Vesting statement Plan modifications Financial statements,
an actuarial report, and an insured plan report
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QDRO
Qualified Domestic Relations Order (QDRO)
A court order that instructs a plan administrator how to pay a divorced spouse or a child or other dependent all or a portion of a pension plan benefit.
May be used to divide the pension plan as a marital asset, or to pay alimony or child support.
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COBRA
Consolidated Omnibus Budget Reconciliation Act
COBRA was designed to protect people who leave an employer from losing their benefit coverage.
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TAXES
IRS Regulations
IRS regulations require employers to withhold
regular amounts from an employee’s pay and
submit these funds on a scheduled basis to the
IRS.
Federal, state, and local income taxes
employee’s share of Social Security tax.
Workers’ compensation taxes
Unemployment taxes Social Security tax.
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Highly Compensated Employees (HCE’s)• Owned more than five percent of the capital or profits in the employer’s business at any time during the year or the preceding year, or• For the preceding year, received compensation of more than $100,000 and was in the top 20 percent of the business’ employees when ranked by compensation.
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Independent ContractorsIRS 20-Factor Test
1. Instructions
2. Training
3. Integration
4. Personal Services
5. Assistants
6. Length of Relationship
7. Work Hours
8. Amount of Work
9. Location
10. Sequence of Work
11. Reports
12. Payment
13. Expenses
14. Tools
15. Investment
16. Profit
17. Multiple jobs
18. Availability
19. Termination
20. Liability
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Compensation Budgets
Bottom-up Approach
Requires supervisors to forecast the pay increases they will recommend for each of their subordinates during the coming plan year.
Top-down Approach
Estimating the pay increase budget for an entire organization and then allocating an amount to each manager or supervisor.
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How to Calculate the Costof Labor Cost Management
To determine a firm’s labor costs:
# of Employees
X
(Average Cash Compensation + Average Benefit Cost)
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International Compensation
Expatriate Pay and Allowances
Additional compensation - base salary, premiums for foreign service and hardship, and allowances for cost of living, housing, storage, and taxes.
Most companies pay at least an extra $10,000 a year for accepting the foreign post, plus another $10,000 if the assignment is considered hazardous or a hardship.
Living quarters. Goods and services/a car/travel for employees and their
families Increased tax liability.