BSAD 310 Spring 2017 - CH 11

Chapter 11:
Employee
Incentives
and Benefits

Why Give Incentives?
• To reward employees for past
performance in hope they will repeat
desired behaviors and want similar
rewards in future
• To move risk associated with paying
employees from firm to individual
• To guide employees toward goals
2Lussier and Hendon, Fundamentals of Human Resource Management. © 2017, SAGE Publications.

The Value of Incentives and
Benefits
• Variable Pay
– Compensation that depends on some
measure of individual or group
performance or results in order to be
awarded
• Incentive Pay
– Two basic choices: Individual or Group-
Based incentives

Individual or Group-Based
Incentives?
• Individual Incentives
– Reinforce performance with rewards that
are significant to a person.
• Group Incentives
– Provide reinforcement for actions of more
than one individual within organization.

Exhibit 11-1: Individual Incentive Plan
Advantages and Disadvantages

Exhibit 11-2: Group Incentive Plan
Advantages and Disadvantages

Individual Incentive Options
• Bonus – A lump sum payment given to
employees at end of a period; most effective
after employees reach a specific goal
• Commission – Payment for selling an item,
usually calculated as a percentage of item’s
price; most effective when it provides a return;
also a disincentive to make a “quick sale”
• Merit Pay – Rewards top performers with
increases in annual wage that carry over
years; most effective when employees
understand benefits of incentive and when top
performers are rewarded

Individual Incentive Options
• Piecework Plans – The more employees
get done, the more they are paid; most
effective when managers set performance
standards and offer feedback
• Standard Hour Plans – Each task is
assigned a “standard” amount of work
time for completion; most effective if
employees must redo substandard work
for no additional pay

Group Incentive Options
• Profit Sharing Plans – Portion of
company proceeds paid over time
(usually quarterly or annually) through
bonus payment; most effective when
management doesn’t minimize profits
and posts records of revenues and
profits; also when employees are
trained to increase revenues/decrease
costs.

• Gainsharing Plans – Accomplished
through factors that cost company
money; can be analyzed and modified
for performance improvement; more
effective than profit sharing because
options are difficult to manipulate and
employees feel they have more control
over results

• Employee Stock Ownership Plan (ESOP) –
Company stock given to employees over time;
offers tax advantages to firm and employees;
motivates employees to feel/act more like
owners of firm
• Stock Options– Employees may buy X shares
of company stock in future at a preset price;
motivates employees to improve value of firm
• Stock Purchasing Plans – Ability to purchase
company stock anytime, usually at discount

Executive Compensation:
Too Much or Just Enough?
• Excesses in Executive Pay
– Questions about ethics and social
responsibility arise when, for example, the
CEO’s pay increases while employees take
pay cuts and are laid off.
– It harms stakeholders (including employees
and shareholders) to reward relatively few
executives.
– It affects market value of firms and results in
Dodd-Frank Wall Street Reform and
Consumer Protection Act.

Consumer Protection Act of 2010
• Limits executive pay in public corporations
and adds requirements for reporting
compensation and shareholder
involvement with executive compensation
• Intent is to create a sound economic
foundation to grow jobs, protect
consumers, rein in Wall Street and big
bonuses, end bailouts, and prevent
another financial crisis

Consumer Protection Act of 2010
• Significant Provisions
– Shareholders can vote on executives’
compensation packages (“say on pay”) and
“golden parachutes.”
– Public companies must disclose CEO’s total
compensation and total median compensation
of employees and ratio.
– Public firms must provide annual information
on relationship between executive
compensation and total shareholder return.

Executive Incentives
• Should be designed to motivate
executives to make decisions that
benefit the organization in the short
term and the long term.
– Perquisites
– Short-term bonuses
– Long-term stock awards or options

Goal of Executive
Compensation
• Creating a system that aligns the
behavior of the executive (agent) with
the interests of the owners of the firm
• Scorecards
• Entrepreneurial organizations

Statutory Benefits
• Social Security: Old age, survivors,
and disability insurance (OASDI)
programs
• Retirement
• Disability and Survivor Benefits
• Medicare: National healthcare program
for elderly or disabled

Workers’ Compensation
• Provides medical treatment and temporary
payments to employees who are injured
on job or become ill because of job
• Paid for by employers
• Rates are primarily determined by three
factors:
– Occupations
– Experience ratings
– Level of benefits payable

Statutory Benefits
Unemployment Insurance: Federal program managed by states.
Provides payments for a fixed period to employees who lost their
jobs through no fault of their own.
• Fails to look for work
• Was terminated “for
cause.”
• As a member of a
union, participates in a
strike against the
company (in most
states).
• Quit voluntarily
• Refuses suitable work
• Becomes self-
employed.
• Fails to disclose any
monies earned in a
period of
unemployment.
An individual will be ineligible for UI if he or she:

Statutory Benefits
• Family and Medical Leave Act of 1993 (FMLA)
Employers must provide unpaid leave to eligible
employees when they or immediate family
members have medical issues. In 2007, SHRM
found 63% of employers reported abuse of
intermittent FMLA leave by employees.
• Patient Protection and Affordable Care Act of
2010 (PPACA) – Employers with more than 50
employees to provide health insurance or face
significant penalties levied by federal government.

Consolidated Omnibus Budget
Reconciliation Act of 1985
(COBRA)
• Employers required to offer temporary health
insurance to individuals who leave their
employment for at least 18 months and up to 36
months.
• Cost of insurance is full rate (employer and
employee contributions), plus a 2% administrative
fee.
• Insurance protection remains without interruption,
which is important for employees undergoing
medical treatment for pre-existing conditions.

Health Insurance Portability
and Accountability Act of
1996 (HIPAA)
• If an employee had group health
insurance at a previous job and if new
employer has health care coverage, the
firm is required to provide the opportunity
to participate in their health insurance
plan.
• Portability of this benefit is advantageous
to people who are undergoing treatment
for preexisting conditions.

Employee Retirement Income
Security Act of 1974 (ERISA)
• Major Provisions of ERISA
– Eligibility: Available to employees over 21
who have worked in firm for one year
– Vesting: Maximum time a firm can retain
company contributions to employee’s account
– Portability: Allows employees to move funds
from employer to another qualified fund
– Fiduciaries: Must act under the “prudent
man” or Reasonable Person Theory
– PBGC: Pension Benefit Guarantee
Corporation ensures retirement funds against
failure

Voluntary Benefits
• Paid Time Off or PTO – Average cost is
approximately $1 for every $10 in direct wages.
• Vacation or Annual Leave – Average vacation
time in 2007 was 15 days.
• Sick Leave – Approximately three of four
employers provide sick leave to employees.
• Holiday Pay – Most companies observe 10
federally mandated holidays along with some
“floating” holidays.
• Paid Personal Leave – Two of five companies
provide paid personal leave in addition to vacation
and sick leave.

Voluntary Benefits:
Group Health Insurance
• Traditional Health Care Plans – Typically cover a
set percent of fees for medical services
• Health Maintenance Organization (HMO) –
Managed care that provides health maintenance
services and medical care
• Preferred Provider Organization (PPO) – Hybrid
between traditional fee-for-service plans and
HMOs
• Health or Medical Savings Accounts
(HSA/MSA) – Allow employers and employees to
fund medical savings accounts, with which
employees can pay medical expenses with pretax
dollars

Retirement Benefits:
Defined Benefit Plan
• Not mandatory, but if provided, firm must
comply with ERISA provisions.
• Employer-provided benefit plans are
available to 74% of full-time workers and
39% of part-time workers in private
industry.
• Defined benefit plan provides retiree with
a specific amount and type of benefit that
will be available when employee retires.

Retirement Benefits:
Defined Contribution Plan
• Defined contribution plan identifies only
amount of funds that go into a
retirement account, not what employee
will receive upon retirement.

401k and 403b Plans
• 401k Retirement Plan – Savings
investment account for individual
employees of corporations.
• 403b Retirement Plan – Similar to
401k, but used for nonprofits
• Matching Contributions – Many
employers that offer a 401k or 403b
provide matching contributions up to a
set maximum.

Retirement Benefits
• IRAs and Roth IRAs – Taxpayers can
make tax-free contributions to an IRA
(subject to maximum annual income limit).
These contributions reduce taxable
income by the full amount of contribution
in the year in which they are placed in
account.
• Simplified Employee Pension (SEP)
Plans – For self-employed individuals and
members of small companies

Employee Insurance Coverage
• Life Insurance
• Disability Insurance – Short-term and/or
long-term protection
• Life and Health Insurance
• Employer-Sponsored Insurance –
Automobile, identity theft,
• Homeowners and renters, and pet

Exhibit 11-3: Employee Benefits

Administration of Benefits
• Flexible Benefit (Cafeteria) Plans –
Employees choose from multiple options.
• Modular Plans – Employees choose benefits
from modules, each with a different mix of
insurance, employee services, and retirement
options; these plans are easiest for HR to
manage.
• Core Plus Plans – Core benefits available to
all; employees choose from remaining benefits.
• Full Choice Plans – Employees have
complete flexibility.

Trends and Issues in HRM
• Personalization of Health Care
– Individuals will continue to gain more
control of their health care planning over
the next several years.
– Individuals will continue to gain power as
they become closer to the health care
provider by using technology.
– Smartphone apps continue to evolve as a
mechanism for managing personal health
care.

BSAD 310 Spring 2017 - CH 11

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BSAD 310 Spring 2017 - CH 11