Human Resource Management

Dr. Karim Kobeissi

Islamic University of Lebanon - 2014

Chapter 10: Indirect Financial Compensation

(Benefits) and Nonfinancial Compensation

Indirect Financial Compensation (Benefits)

Indirect financial compensation (or benefits) includes all
financial rewards not included in direct financial compensation.
According to a recent survey, benefits are the second most
important driver of job satisfaction, coming in just behind job
security.
Benefits are typically unrelated to employee productivity;
therefore, although they may be valuable in recruiting and
retaining employees, they do not generally serve as motivation
for improved performance.

Discretionary Benefits
Discretionary employee benefits include benefits the law does not
require the employer to offer. Such benefits might include physical
health, prescription drugs, dental and vision insurance for the
employee and his/ her family, life insurance, a pension plan, tuition
assistance, and assistance with paying for child care.
Employers typically pay for part of the cost of the benefit plan so

employees receive coverage at a reduced rate.

Discretionary benefits frequently include paid vacations and personal

days,

too,

as

well

as

maternity

or

paternity

leave.

10-4

Voluntary Benefits

Voluntary benefits: Usually entirely paid by the

employee, but the employer typically pays the
administrative cost.
10-5

Indirect Financial Compensation (Benefits)

in a Total Compensation Program
External Environment
Internal Environment

Compensation
Direct

Financial

Indirect (Benefits)

Nonfinancial

The Job

Job Environment

Legally Required Benefits

Social Security
Unemployment Compensation
Workers Compensation
Discretionary Benefits
Payment for Time Not Worked
Health
Care
Life
Insurance
Retirement
Plans
Disability Protection
Employee Stock Option Plans
Employee Services
Premium Pay
Voluntary Benefits

10-6

Total Rewards
All the ways in which people are rewarded
when they come to work
Pay, benefits, and other non-financial rewards
Put together to make coherent and integrated
whole
Directed toward maximum attainment of
corporate goals
All items that add value to an employee
10-7

Mandated Benefits (Legally Required)

Employers voluntarily provide most
benefits, but the law requires others.
These legally required benefits
currently account for about 10 percent
of total compensation costs and include:
(1) Social Security, (2) unemployment
compensation,
(3)
workers
compensation insurance, and (4) family
and medical leave.

1-Social Security
The Social Security Act of 1935 created a system of retirement benefits
(Federal payroll tax to fund unemployment and retirement benefits).
Subsequent modifications to the act include:
- Disability insurance : protects employees against loss of earnings
resulting from total incapacity.
- Survivors benefits: provided to certain members of an employees
family when the employee dies.
- Medicare: provides hospital and medical insurance protection for
individuals 65 years of age and older and for those who have become
disabled.

2- Unemployment Compensation
Unemployment compensation provides workers whose jobs
have been terminated through no fault of their own monetary
payments for up to 26 weeks or until they find a new job.
The intent of unemployment payments is to provide an
unemployed worker time to find a new job equivalent to the one
lost without suffering financial distress.
Administered by states and therefore benefits vary by state.
A payroll tax paid solely by employers funds the unemployment
compensation program.

3- Workers Compensation Insurance

Workers compensation benefits provide a
degree of financial protection for employees
who incur expenses resulting from job-related
accidents or illnesses.
Administered by states
Employers pay the entire cost of workers
compensation insurance, and their past record
of job-related accidents and illnesses largely
determines their premium expense.

Discretionary Benefits
Major categories of discretionary benefits include:

Payment for time not worked

Health care
Life insurance
Retirement plans
Disability protection
Employee stock option plans (ESOP)
Employee services
Premium pay
10-12

Payment for Time Not Worked: Paid Vacations

Employers recognize that employees need
time away from the job for many purposes
(e.g. to rest, and thus return to work more
productive).
Includes paid vacations, sick pay and paid
time off, sabbaticals, and other forms of
payment for time not worked.
Paid vacations may also encourage
employees to remain with the firm, as
vacation time typically increases with
seniority.

Payment for Time Not Worked: Sick Pay and Paid Time
Off
Many firms allocate each employee a certain number of
days of sick leave per year.
Some managers are very critical of sick leave programs
because some individuals abuse the system by calling in
sick when they want a paid day off.
Paid time off (PTO): Certain number of days off provided
each year that employees can use for any purpose.
10-14

Payment for Time Not Worked: Sabbaticals

Sabbaticals are volunteer temporary leaves of
absence from organization, usually at reduced
pay.
Used in academic community for years
Recently entered the private sector (e.g. UPS
and Xerox).
Often sabbaticals help to reduce turnover and keep
workers from burning out, hopefully returning
revitalized and more committed to their work.
10-15

Payment for Time Not Worked: Other Forms

It is also common for organizations to provide payments to assist
employees in:
Performing civil duties (e.g. voting)
Handle personal affairs
Jury duty
National Guard or military reserve
Bereavement time (for the death of a close relative)
Finally, there is the payment for time not worked on the job such as:
- Rest periods, coffee breaks, lunch periods, cleanup time, and
travel time.

Health Care
Health care represents the most expensive
item in the area of indirect financial
compensation.
Cost of insuring employees rose by 7% in 2010,
and the average employee health premium was

$2,292.
Employers are using programs to better manage
costs, such as consumer-driven plans to give
employees financial incentives to use health care
services efficiently.
10-17

Consumer-Driven Health Care Plans

Each employee given set amount of money
annually with which to purchase health care
coverage

10-18

On-Site Health Care

What do Toyota, Nissan, and Walt Disney have in
common? They all provide on-site health care for
their employees.
On-site health care assists in treating minor illnesses
and injuries, vaccinations, physical therapy, and
providing follow-up care.
On-site health care allows employers to reduce the
number of visits employees make to more costly
facilities, such as physicians offices and hospital
emergency rooms.
10-19

Life Insurance
Group life insurance is a commonly
provided benefit to protect employees
family in event of death.
Although the cost of group life insurance
is relatively low, some plans require the
employee to pay part of the premium.

10-20

Retirement Plans
Retirement plans are a
hot
topic
because
employers are one of the
US societys primary
providers of retirement
income for the aging
generation.

10-21

Disability Protection
Some firms provide additional long-term
disability benefits after the short-term
workers compensation insurance plan
runs out.
These plans may provide 5070 percent
of an employees pretax pay if they are
out due to illness or injury, or are unable
to work for an extended period.
10-22

Employee Stock Option Plan (ESOP)

An employee stock option plan (or ESOP) is a plan in which a firm
contributes shares of their stock to a trust.
The trust then allocates the stock to participating employee accounts according
to employee earnings.
ESOP advocates see them as a means to align the interests of workers with
those of their companies to stimulate productivity. This practice, long reserved
for executives, now often includes employees working at lower levels in the
firm.
The difficulty is that employees have to wait until retirement to receive the
benefits.
Some employees want ability to sell their shares prior to retirement, which
ESOPs do not allow.

Employee Services
Organizations offer a variety of benefits that can
be called employee services. These benefits
encompass a number of areas, including:
Child care
Educational assistance
Food service/subsidized cafeterias
Scholarships for dependents
Relocation benefits
10-24

Child Care
80% of employees
miss work due to
unexpected child-care
coverage issues.
Every $1 invested in
backup child care
yields $3 to $4 in
returned productivity
and benefit.
10-25

Educational Assistance
Some companies reimburse employees
for part of the fee for completed courses,
while
others
provide
half
the
reimbursement up front and the rest upon
satisfactory completion of the course.
IRS regulations allow for up to $5,250 of
nontaxable
educational
assistance
benefits per year.
Educational
assistance
Improves
employee retention

Food Services/Subsidized Cafeterias

There is generally no such thing as a free lunch.
However,

firms

that

supply

food

services

or

subsidized cafeterias provide an exception to this

rule. What they hope to gain in return is increased
productivity, less wasted time, enhanced employee
morale, and, in some instances, a healthier workforce.

Scholarships
About 27% of
companies provide
scholarships for
dependents.
This boosts
employee
recruitment and
retention.
10-28

Relocation Benefits
Company-paid shipments of household
goods and temporary living expenses.
Cover all or a portion of the real estate
costs associated with buying a new home
and selling the previously occupied home.
Relocation packages vary.
Moving may impact quality of life.
10-29

Premium Pay
Compensation
paid
to
employees for working long
periods of time or working under
dangerous
or
undesirable
conditions
Hazard pay: Pay for work under
extremely dangerous conditions
Shift differentials: Pay for
inconvenience of working less
desirable hours
10-30

Voluntary Benefits
As firms search for ways to reduce costs, many organizations
are moving to voluntary benefits, which are 100 percent paid
by the employee, but the employer pays the administrative
cost.
Employees benefit because their premiums typically reflect
group discounts and thus are lower than the employees could
obtain on their own. The most common voluntary products
provided include term life insurance, vision insurance, longterm care insurance, accident insurance, and dental insurance.

Customized Benefit Plans

Customized benefit plans permit flexibility by allowing each
employee to determine the components that best satisfy his or her
particular needs.
Workers may have considerable latitude in determining how much
they will take in the form of salary, life insurance, pension
contributions, and other benefits.
Obviously, organizations cannot permit employees to select all their
benefits. For one thing, firms must provide the benefits required by
law. In addition, it is probably wise to require that each employee
have core benefits, especially in areas such as retirement and
medical insurance. The downside to customized benefit plans is
that they are costly.

Work-Life Balance
Effective worklife balance programs focus on
alleviating any personal issues that can detract
from an employees work. For employers, creating
a balanced worklife environment can be a key
strategic factor in attracting and retaining the most
talented employees.
10-36

Flextime
Flextime is the practice of permitting employees to choose their
own working hours, within certain limitations.
In a flextime system, employees typically work the same
number of hours per day as they would on a standard schedule.
However, they work these hours within what is called a
bandwidth, which is the maximum length of the workday. Core
time is that part of the day when all employees must be
present.
Many firms are using flextime
10-38

Job Sharing
Job sharing is an approach to work that allows two part-time
people to split the duties of one job in some agreed-upon
manner. The workers are paid according to their contributions.
It provides an option to retain workers, particularly women who
are opting out of the workforce to raise families. Often job
sharers work as hard in three days as those working full time,
and are grateful for the opportunity to be able to combine work
and other interests.

10-41

Part-Time Work
Part-time employment adds many highly qualified
individuals

to

the

labor

market

by

permitting

employees to address both job and personal needs.

Companies that offer part-time employment show
increased rates of productivity and less employee
turnover than other companies.
10-43