Direct and Indirect Compensation - Review Notes

Human Resource Management Revision Article Series
The term compensation refers to all forms of financial returns and tangible benefits that employees receive as part of employee relationship.

The compensation system does influence company's success. The amount of pay can motivate, energize, and direct behavior. The compensation level of an organization attracts high performance talent. It also has effect on the profitability of the company.

Compensation system of a company has to take care of external equity and internal equity.

External equity is comparison between one organization's compensation and other organization's compensation levels for similar jobs.

Internal equity is comparison among various jobs.

Organizations have to maintain both to have a workforce that is satisfied and voluntarily stays with the company.

Job Evaluation for Internal Equity

Job evaluation is defined as the process of assessing the value of each job in relation to other jobs in an organization.

Job evaluation methods

1. Job ranking 2. Job classification 3. Point-factor plans

Current Issues and Trends in Salary Administration

Broadbanding
Pay for knowledge, skills or competence
Team pay plans

Government Influence on Compensation Issues

The Fair Labor Standards Act (FLSA) 1938
The minimum wage law is in force in USA. In 1938, the minimum wage was $0.25. In 2002, it was $5.15 per hour.

Effective from July 24, 2009, the minimum wage is $7.25 per hour.
http://www.dol.gov/dol/topic/wages/minimumwage.htm
FLSA's overtime provisions establish 40 hours as the standard workweek and employers have to pay workers at least 1.5 times the regular hourly rate for all work in excess of 40 hours in any workweek.

Pay Equity or Comparable Worth Policy

Indirect Compensation: Employee Benefits

Five Categories

1. Government Mandated Programs

Social security
Unemployment insurance
Workers' compensation insurance
Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA)
Family Medical Leave ACt of 1993 (FMLA)
State-mandated diability insurance plans

2. Employee Welfare Programs

Health care plans
Life Insurance

3. Pension Plans

4. Time-off Programs

5. Employee Services

Education programs
Employee assistance programs and mental health care
Employee recognition programs
Child care

International compensation Issues

Base salary
Foreign service premium
Benefits
Tax issues

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