Chapter 7: Employee Compensation Issues

Types of Retirement Benefits

-Defined benefit plans -defined contribution plans

Importance of pay equity

-External equity is important to keep good workers. If workers can get compensated better for doing the same work somewhere else, they will often leave -An employer who pays male and female employees differently for equivalent work violates the Equal Pay Act of 1963 (EPA) -Compensation equity is also important for productivity and morale

the primary mandatory benefits provided to employees:

-Social Security is a system of retirement and disability benefits of which employers are required to bear half of the cost through payroll taxes. You should note that Medicare, which is health care for the elderly, falls under the Social Security system and is included as a mandatory benefit funded through payroll taxes. -Worker's compensation provides financial benefits to workers injured on the job. Employers pay the entire cost of the insurance. -Unemployment insurance provides payments to unemployed employees to help make ends meet until new employment is found. The insurance is funded completely by employers through a payroll tax. -Family and medical leave under the Family and Medical Leave Act is a mandatory benefit for employers employing at least 50 employees. -COBRA is a law that requires employers to make health coverage available to employees upon termination of their employment. The cost must be at the same cost that the employer would pay and the benefit may last between 18 and 36 months. -Some employers are required to provide employer-sponsored health care plans under the Patient Protection and Affordable Care Act (ACA) commencing in 2015, or face a penalty.

piecework plan

-an employee is paid a certain amount of money per unit produced (example: Patty is paid $20 for each suit she completes) -Sometimes employees are paid a base pay along with the piecework rate

Bonuses (pay for performance)

-are compensation earned above normal pay for exceptional performance - like meeting a production goal or a sales quota -is a one-time payment to an employee as a reward for meeting certain performance or productivity goals. -is not a permanent addition to the employee's compensation and may or may not be granted depending on the employee's performance.

Types of Executive Compensation

-base salary as part of his overall compensation package, which is a specific fixed payment that is usually calculated on an annual basis and paid throughout the year in regular installments. -receiving the bonus is conditional on meeting certain performance standards -The company will often either give the executive free shares in the company or give a stock option -lucrative benefits as part of their compensation package:health insurance, life insurance, pension plans and severance packages when they leave -Perks are often part of the benefits offered and may include such things as country club memberships, car services and use of the company jet

profit sharing

-employees are rewarded if a company's profits increase -It's a way for employees to have an added stake in the company's success -profit-sharing plan has a formula that provides a fixed percentage of profits that will be divided among employees

defined contribution plans

-employer does not guarantee any payment of benefits upon retirement but rather contributes a set amount of money to an employee's retirement account each year -Money available for retirement is based upon the market value of the funds at retirement -Any contributions made to it are not taxable until withdrawn at retirement

Gain sharing

-focuses on employee participation in management and rewarding employees for increases in efficiency that result in cost savings -Instead of sharing in increases in profits, employees share in the gains realized by the savings due to reduction in waste and increases in efficiency

employee stock option

-is a contractual right that entitles an employee to purchase shares of the company's stock at a set price sometime in the future. -Employees must hold the stock options for a specific period of time before exercising them, which is called the vesting period

cash balance plan (alternative defined benefit plan)

-is a defined benefit plan that defines the benefit in terms that are characteristic of a defined contribution plan. -employee is entitled to a guaranteed payment based upon the account balance -Some plans even allow people to take a lump sum payment equal to the account balance. -account balances are often referred to as hypothetical account balances because they really don't represent actual contributions or actual gains or losses

Commissions

-is a method of payment whereby a person is compensated by receiving a percentage of the revenue the employee generates through sales -Some employees are paid a base salary or wage in addition to a commission on sales.

traditional pension benefit

-is based upon a formula, consisting of his years of service and his average salary during his final years of work -When employee retires, he will receive pension payments until death -If employee's wife, survives him, she will receive a reduced benefit.

Direct compensation

-is the money directly paid to employees in exchange for their labor -Direct compensation includes wages, salaries, bonuses, tips and commissions.

Compensation Equity or financial equity

-is the perception by employees that they are being paid fairly -The perception of being overpaid or underpaid can create a sense of inequity in the workplace - a sense of unfairness -Compensation equity has an external component and an internal component

401(k) Plans

-most common defined contribution plan -employer to make specific contributions to the retirement savings fund established by an employee under the plan -employee pays taxes after she withdraws the money from the account during retirement. -employer is also permitted to make matching contributions to the employee's account. -allows employee to borrow against her retirement savings in certain circumstances -can transfer, or rollover, her funds into another qualified retirement account without any penalty if she changes jobs. -do not guarantee a specific amount at retirement - the value of retirement funds will depend upon how successful the savings were invested (market rate going up and down)

Employee Benefits Defined

-often referred to as indirect financial compensation -These are benefits provided to employees that have financial value to the employee, but do not constitute a direct cash outlay to an employee

some voluntary benefits

-paid time off, sick leave, and vacation time -medical insurance even though his employer is not subject to the ACA mandate -dental insurance -loved ones are protected by life insurance should employee die -participate in the company's retirement plans, such as 401(k) plans and pension plans -stock options -long-term and short-term disability insurance in case employee is injured and cannot work -different employee services, such as fitness club memberships, and employee assistant programs, like counseling, or referral services for counsel and legal services

Setting executive compensation in a corporation is the responsibility of

-the company's board of directors -Compensation is negotiated between the board and the executive at arm's-length, which means each side has fairly equal bargaining power

Defined benefit plans

-provide an employee with a set amount of retirement benefit when the employee retires -employer guarantees a payment based upon a formula from the time of employment until the death of the employee. Surviving spouses are usually entitled to a reduced benefit.

Compensation

-simply pay for services during the course of employment -An employee performs the duties of his or her job and receives pay and other non-monetary compensation in exchange for performing the job.

Performance Incentives

-the idea is to align the interest of his company and its shareholders with the interests of his employees -If the company is successful, then the employees are rewarded

The Fair Labor Standards Act (FLSA) requires

-wage employees to be paid an overtime rate of pay at least one-and-a-half times their regular wage for any time worked over 40 hours during a weekly pay period -salary employees (exempt employee) are not covered by the overtime provisions of the FLSA

merit pay

-which is a raise in base pay based upon performance -Every year, employee's performance is assessed, and he is given a raise if he improves his performance during the past year -a problem with merit pay is that employees receive the increase in base pay even if their performance slips after the raise

_____ is a voluntary benefit offered by employers. Family and medical leave Workers Compensation insurance COBRA 401(k) plan

401(k) plan

Tiffany's employer set up a retirement account for her where she can contribute part of her salary. The plan also provides that her employer will make yearly contributions to her retirement account as well. Which of the following best describes the plan? A traditional pension A cash balance plan An IRA A defined benefit plan A 401(k) plan

A 401(k) plan

Tom was top salesperson in the department and won a contest. His prize includes: a cash bonus, a small raise in his salary, the ability to buy company stock at a discount price and a slightly more flexible schedule. Identify which of these is indirect compensation: The ability to buy company stock at a discount price A slightly more flexible schedule Cash bonus A small raise in his salary

A slightly more flexible schedule

John's retirement benefit is based upon a formula consisting of his years of service and the average of his salary during his final years of work. The company is obligated to make these payments. What type of retirement benefit does he have? An IRA A defined contribution plan A cash balance defined benefit plan A 401(k) plan A traditional defined benefit pension

A traditional defined benefit pension

What do stock options, profit sharing, and gain sharing have in common? All align employees' interests with the owners' interests All involve employee participation in management They involve direct financial compensation to employees All of them attempt to achieve company unity by harmonizing benefits of lower- and middle-management

All align employees' interests with the owners' interests

Which of the following is an example of internal equity in the context of compensation? All employees within the company having equal pay, regardless of skill or experience All employees that have started working in that company from the beginning, regardless of their skill, having the same level of pay All employees within a company with various pay levels having the same level of autonomy in decision making All employees that have the same level of experience and skill receiving the same sum of money

All employees that have the same level of experience and skill receiving the same sum of money

A/n _____ is a specific fixed payment that is usually calculated annually and paid throughout the year in regular installments. Bonus Base salary Interest Option

Base salary

Mary receives a bonus at the end of the year based on a percentage of money she and her fellow employees saved the company by improving efficiency and reducing waste. Why is this an example of gain sharing? Because it's an indirect compensation mechanism Because it rewards employees for a company's profits increase Because it focuses on the stock value of the company Because it rewards employees for reducing waste and improving efficiency

Because it rewards employees for reducing waste and improving efficiency

Jane is a CEO of an IT company and the department that she manages raised in 2 days what it takes other departments to earn in a month. For that Jane received a $100,000 bonus. Why is this an example of a spot bonus? Because the form of the bonus was financial Because the bonus was earned, as they were far more productive Because it was earned in a relatively short period Because you have to be at the top of the firm to receive such payments

Because it was earned in a relatively short period

Why is it important to conduct a salary survey? Because it's important for the employer to know how well a certain position is paid Because it's important for the employer to be aware of the minimum wage Because it's important for the employee to provide the employer with feedback about the work environment Because it's important for the employee to provide the employer with his opinion on his wage

Because it's important for the employer to know how well a certain position is paid

At the end of the year, Sue receives an additional payment representing a fraction of the net earnings of her company for the year. Why is this an example of profit sharing? Because she receives part of the company's profit Because she receives money for efficiency and better resource management Because it's a one time bonus that has nothing to do with Sue's work Because employees are rewarded by the ability to buy stock

Because she receives part of the company's profit

What is the difference between bonuses and stock options? In the U.S., bonuses tend to be much lower than an executive's base salary, while stock options tend to be higher. Bonuses are unconditional benefits, while stock options allow executives to sell the company stock. Bonuses are given to executives irrespective of the company's performance, while and stock options are only offered if the company is doing well Bonuses are variable and conditional on executives achieving certain performance standards, while stock options allow executives to purchase company stock at a set price for a certain period of time.

Bonuses are variable and conditional on executives achieving certain performance standards, while stock options allow executives to purchase company stock at a set price for a certain period of time.

Which of the following would NOT be part of an executive's lucrative benefits? Severance packages Life insurance Pension plans Commissions

Commissions

Contractors and Compensation

are paid pursuant to the terms of their contract with the company.

David sells shoes in a retail company. His boss agreed to pay him a commission for each pair of shoes he sells. Which of the following statements is an example of what his boss promised? Dave would get an additional one-time payment of $1,000 for selling a lot of shoes that month Dave has a base salary and also receives 5% of the value for each pair of each shoes he sells. Dave's performance review showed he sold a lot of shoes and he got a raise due to that fact. If Dave attends a seminar where learning advanced sales techniques, he will get a raise of 2%.

Dave has a base salary and also receives 5% of the value for each pair of each shoes he sells.

Which of the following laws regulate defined benefit and defined contribution plans? Wagner Act NLRA Social Security Act ERISA FLSA

ERISA

John and Mary work as computer programmers at the same company. John has an additional programming certification and three more years at the company so he is paid more. This is an example of which of the following? Employee equity Gender bias Internal equity Gender equity External equity

Employee equity

Which of the following is FALSE about gain sharing? There's an employee participation component Employees share in the savings realized through increases in efficiency The focus is on efficiency Employees share in the profits earned

Employees share in the profits earned

voluntary benefits

Employers often provide benefits that are not required by law

Tim and Anne were hired on the same day at the same company. They have similar skill sets and do the same job. However, Anne is paid less than Tim. Which of the following laws is being violated? Pay Equity Act Equal Pay Act Americans with Disabilities Act Environmental Protection Act American Fair Pay Act

Equal Pay Act

Which of the following statements best describes the current trend of executive compensation in the United States? Executive compensation and employee pay are growing at the same rate. Executive compensation is neither growing or shrinking. Executive compensation is shrinking. Executive compensation is growing at a faster rate than employee compensation.

Executive compensation is growing at a faster rate than employee compensation.

Bob is a machinist who discovers that machinists at the neighboring factory are paid a higher wage than he is for doing the same job. This is an example of what? External equity Internal equity Internal inequity External inequity Corporate inequity

External inequity

John is working for an IT company based upon a contract and the company doesn't withhold any payroll taxes when it pays him. Which is most likely true about John's employment? He is unemployed, but has a part-time job, so he doesn't have to pay taxes He is a worker on a pay-for-performance system, and companies do not have to pay payroll taxes for them He is self-employed and working as an independent contractor so payroll taxes are not withheld He is an employee of the IT company, but it's illegally not paying its payroll tax

He is self-employed and working as an independent contractor so payroll taxes are not withheld

Indirect compensation include

Health and life insurance Social Security benefits Retirement plans like 401K Paid time off Flexible schedules Telecommuting or work-from-home options Uniforms Meals Flights Hotel discounts

How are benefits calculated in Fred's cash balance retirement plan? His benefits will vary depending upon market gains and losses. His benefits are based on the cash balance of his 401K. His benefits are based on a hypothetical cash balance. His benefits are based on how much he contributed. His benefits will be calculated by the Social Security Administration.

His benefits are based on a hypothetical cash balance.

Tanya is negotiating with her employer about a new contract. They have agreed that she will be paid by commission. Identify which of the following BEST reflects such a deal: If she's paid a fixed amount each month with the possibility of efficiency bonuses If she's paid to work 40 hours a week, but she will get extra money if she works 45 or more hours If she's paid a fixed amount for every hour that she works If she's paid a percentage of all revenue that she generates for the company

If she's paid a percentage of all revenue that she generates for the company

Other Forms of Compensation

Incentives Bonuses Stock options

Beth receives stock options from her employer as part of her overall compensation package. What type of compensation is this? Non-financial Illegal Direct Indirect

Indirect

What type of compensation is employer-sponsored health care? Non-regulated benefits Indirect financial compensation Pay-for-performance Non-financial compensation

Indirect financial compensation

Bob and Rob work for the same company. They have the same responsibilities and the qualifications. They also perform equally well, but Rob is paid more than Bob. This is an example of which of the following? Gender equity Internal equity External inequity External equity Internal inequity

Internal inequity

Stan is paid $10 for each hour he works. Why is this an example of a wage? It is an example of a commission. It is an example of a salary. Any type of financial compensation is an example of a wage. It is a sum of money paid for an hour or fixed period of work.

It is a sum of money paid for an hour or fixed period of work.

Bob's annual performance review showed a marked improvement in his productivity. As a result, he is given a raise. Why is this an example of merit pay? It is a form of pay he receives based on his education level. All employees receive a raise after working in the company for a year. It is additional pay based on past results in the company. Any form of financial incentive is a form of merit pay.

It is additional pay based on past results in the company.

Alex is paid a salary of $35,000 a year with the potential for further money if he meets certain performance goals. Why is this an example of direct financial compensation? He has to meet certain goals to receive compensation. He is paid only if others in the company meet the performance goals. It is an example of direct payment for labor. His total payment depends on his workload

It is an example of direct payment for labor.

Pay-For-Performance

Like commission, it's a variable-based pay plan, which means there is some variability in the amount of compensation that an employee will receive.

Which theory claims that executive compensation is not truly based upon performance or arms-length negotiation? Managerial power theory Shareholder theory Marxism theory Stakeholder theory

Managerial power theory

Tina's employer gives her a contract that allows her to purchase company stock in the future at a set price. Tina has chosen to purchase the stock in two-to- three days and based on the contract she must hold it for at least one month before she can exercise them. This doesn't bother her as she didn't plan to sell them for at least six months when she wants to buy a new car. What is the vesting period in this case? One month Six months Two to three days When Tina sells the stock.

One month

Mary is an exempt supervisor of the accounting department. She worked 60 hours last week closing the books for month end. How much will she be paid ? Her weekly wage plus any incentives One week's salary 60 hours worth of wages 60 hours at her salaried rate

One week's salary

How are mandatory benefits different from voluntary benefits? Neither mandatory nor voluntary benefits are required by law. Both mandatory and voluntary benefits are required by law. Only voluntary benefits are required by law Only mandatory benefits are required by law.

Only mandatory benefits are required by law.

Tabatha is an accountant. She's paid a base salary in addition to the possibility of more compensation if she exceeds the firm's minimum billable hours she's expected to generate. What is this type of compensation system called? Pay-for-performance Commission Salary Wage

Pay-for-performance

Which of the following can result from compensation inequity? Greater morale Less turnover Greater productivity Resentment Better teamwork

Resentment

Which of the following is NOT an example of indirect financial compensation? Vacation time Salary Health insurance Social Security Insurance

Salary

Cathy works as a stylist cutting hair. She gets paid for each haircut. Why is this example of piecework? Her pay was previously defined by her employer. She is paid per unit produced or service performed. She gets paid different amounts of money. It requires an exact skill.

She is paid per unit produced or service performed.

Edward is a computer programmer who just got a raise after successfully earning a certification in a new programing language the company uses. What type of incentive pay did he earn? Bonus Skills-based pay Commission Merit pay

Skills-based pay

Which benefit is only partly paid by employers? Unemployment insurance Payroll tax Social Security benefits Workers compensation insurance

Social Security benefits

Which of these is correct about a defined contribution retirement plan? The employee will receive their contributions adjusted for market gains and losses. The employee's monthly checks are guaranteed by the Social Security Administration. The employer puts a specified amount into the plan each year. The employer's contribution is specified by the PBGC. The amount the employee will receive each month is already defined.

The employer puts a specified amount into the plan each year.

Which of the following is an example of a mandatory benefit? Pension plan Dental insurance Paid sick leave Unemployment insurance

Unemployment insurance

Mandatory benefits

are benefits that the government mandates, or requires, that employees receive from employers as a matter of law

Which of the following is an example of non-financial compensation? Your manager deciding you're doing such a good job that he will give you more autonomy in decision making. Your boss promises a bonus if you continue with the good work. Your manager providing you with a car and health insurance because you were one of the most productive employees. Your boss giving you a raise for meeting all of the performance quotas.

Your manager deciding you're doing such a good job that he will give you more autonomy in decision making.

Stock options are considered _____ direct compensation. a benefit an incentive. part of salary.

a benefit

Jonas, the owner of a small engine repair shop, is going to give all of his employees a paid day off on New Year's Eve if profit goals for the year are achieved. This form of compensation is called: non-exempt salary. a bonus. exempt salary. an incentive

an incentive.

Stock options

are a benefit given to employees that carries the right to buy and sell shares of stock in the company.

Wages, also known as 'non-exempt,'

are another form of compensation and are an hourly dollar amount paid to an employee for each hour he works.

spot bonuses

are small bonuses paid to employees for great performance in a short period of time (For example, a telemarketer who had a great sales day or week may receive a spot bonus for the effort.)

Incentives (reward for performance)

can be things such as company parties for meeting production or sales goals. They are considered monetary because in some cases monetary compensation is given

Non-financial compensation

doesn't have any monetary value; instead, it involves the satisfaction that an employee receives from his work environment. This satisfaction can be emotional and psychological.

Managerial power theory posits that

executive compensation is often excessive when compared to a hypothetical and economically efficient compensation contract where both parties have equal bargaining power

Some of the most important exemptions to overtime pay include

executive, administrative, professional, outside sales and other highly compensated employees

Strategy Considerations hen developing a cwompensation

external competitiveness and internal pay equity

Non-exempt employees who receive wages are paid _____. for only 40 hours a week in daily paychecks just like a salary for every hour they work

for every hour they work

Skills-based pay

involves increasing an employee's pay based upon an increase in an employee's skill and expertise that is valuable to the employer.

Indirect compensation

is a benefit given to an employee that has financial value, but is not a direct monetary payment.. t is often referred to as a non-cash benefit

Salary, also known as 'exempt,'

is a set amount of money paid to an employee each pay period. This means that regardless of how many hours a salaried or exempt employee works, his compensation does not increase.

Incentive Compensation

is pay given to employees who meet certain performance standards

External equity

is the perception that an employee is being paid the same as others working in a similar job at other companies.

compensation system

is the sum total of all monetary and non-monetary benefits provided to employees in exchange for their willingness to work.

Pay equity

means that employees believe that their pay is basically equal to the value of their work. It also means that employees that have equivalent responsibilities with about the same degree of knowledge, skills, experience, productivity and seniority are paid about the same

Defined benefit pensions plans & defined contribution plans are regulated by

the Employee Retirement Income Security Act of 1974 (ERISA)

Employee Equity

when employees are paid in a manner consistent with their unique characteristics, such as level of productivity, knowledge, skills and seniority, compared to other employees. (Ex: you got paid more since you have more experience and more certifications)