Total Rewards:
It’s More Than Just a Paycheck!
Audra H. Nelson, M.S.
2010
Learning Objectives
By the end of this learning module, students will be
able to:
• Distinguish between total rewards and total
compensation, and identify compensation and noncompensation elements of total rewards.
• Effectively communicate a total rewards system to
current and prospective employees.
• Identify the implications of using salary surveys to
ensure externally equitable and fiscally responsible
compensation systems.
• Define job evaluation and its use to develop
internally equitable compensation systems.
• Recognize U.S. laws that relate to compensation
and benefits systems.
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Total Rewards
• A system of rewards.
• Not just compensation and benefits.
• Includes anything and everything employees
value and the employer is willing and able to
offer.
• Includes compensation and non-compensation
elements.
• Different value levels.
(Henderson, 2006; WorldatWork, 2008)
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Distribution of Compensation and Benefits
U.S. Bureau of Labor Statistics (Dec. 2009)
Private Industry
$8
$19.41
Compensation
Benefits
State and Local Government
$13.50
Compensation
Benefits
$26.10
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Compensation Elements of Total Rewards
Monetary Payments
• Base wages, salary:
> Hourly, weekly or monthly pay that
employees receive in exchange for work.
> Differentials for shift and/or special skills
(also known as premium pay (e.g., bilingual or multi-lingual skills).
(Henderson, 2006; WorldatWork, 2008)
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Compensation Elements of Total Rewards
Monetary Payments (continued)
• Variable pay is pay that varies based on
performance.
> Piece-rate plans: Payment based on units
produced.
> Differential piece-rate plans.
> Commission: Rewards based on volume.
• Typically reserved for sales personnel.
• “Draw.”
(Henderson, 2006; WorldatWork, 2008)
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Compensation Elements of Total Rewards
Monetary Payments (continued)
• Variable pay is pay that varies based on
performance.
> Bonus: One-time reward for good
performance.
> Stock options: Options to buy company
stock at a pre-determined price.
> Profit sharing: Opportunity to share in the
organization’s profits.
(Henderson, 2006; WorldatWork, 2008)
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Compensation Elements of Total Rewards
Benefits
Rewards based on organization membership and
sometimes position held.
Legally Required Benefits
• Social Security: Federally administered insurance
and retirement program.
• Unemployment compensation: Provides income to
employees who have lost their jobs.
• Workers’ compensation: Protects employees who
are injured on the job.
(Byars & Rue, 2004)
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Compensation Elements of Total Rewards
Other Commonly Offered Employee Benefits
• Pay for time not worked (e.g., holidays,
vacation).
• Disability income continuation (provides
income to employees in the event of illness or
disability).
• Retirement savings programs (provides
income continuation following retirement).
(Henderson, 2006; WorldatWork, 2008)
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Compensation Elements of Total Rewards
Other Commonly Offered Employee Benefits
• Spouse/family income continuation (e.g., life
insurance).
• Health and liability protection (e.g., medical,
dental, prescription drug insurance coverage).
> Flexible benefits plan or cafeteria plan.
• Other perks.
(Henderson, 2006; WorldatWork, 2008)
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Non-compensation Elements of Total Rewards
• Job Satisfaction
> Enjoyment experienced as a result of
performing the work itself.
• Autonomy
> Employee discretion to do their work the
way they see fit.
(Henderson, 2006; Mathis & Jackson, 2006; WorldatWork, 2008)
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Non-compensation Elements of Total Rewards
• Meaningful Work
> Is the work important to the employee or
other people?
• Flexible Schedules and Work
Arrangements
> Focus is on work/life balance.
• Growth Opportunities
> Includes professional and intellectual
growth, emotional maturity.
(Henderson, 2006; WorldatWork, 2008)
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Non-compensation Elements of Total Rewards
• Relationships with Other People
> Social network.
• Adequate Resources
> Opportunities for training, access to
technology, etc.
• Quality of Leadership
> The skills and knowledge of leaders,
knowledge sharing, feedback.
(Henderson, 2006; WorldatWork, 2008)
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Non-compensation Elements of Total Rewards
• Work Environment (Safety and Comfort)
• Recognition and Awards
• Other
(Henderson, 2006; WorldatWork, 2008)
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Recognizing and Realizing Value in Rewards
• Depends on individual differences.
• Goal is to influence human behavior; attraction
to the organization, retention and
performance.
• How do we know what people value? Ask
them!
• How will employees and prospective
employees know what elements of total
rewards the organization offers? Tell them!
(Henderson, 2006; WorldatWork, 2008)
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Communication of Rewards Systems
Communicating to Prospective Vs. Existing
Employees
• Methods:
> Print materials.
> Electronic communications (e-mails,
employee communications on electronic
company message boards such as an
intranet site, library of rewards system,
information on an HR page of the intranet,
employee self-service options, company
web site, etc.).
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Communication of Rewards Systems
Methods
> Poster board (possibly used at a job fair).
> Job advertisements (print, Internet, radio).
> Verbal communications (at job fairs, during
interviews, new-hire orientation, staff
meetings, one-on-one meetings between
supervisor and direct report).
> Other Internet venues (YouTube,
Facebook).
> Other?
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Communicating the Non-compensation Elements
of Total Rewards
• Non-compensation elements may be difficult to quantify.
• Report employee satisfaction survey results (e.g., 75%
of employees are satisfied or very satisfied with their
job; employees are most satisfied with quality of
leadership and the opportunities to build relationships
with other people).
• Report numbers of employees who earn promotions
during the year (e.g., 20% of the employee population
received a promotion in 2009).
• Report dollars spent on investment in new technology
during a recent year (e.g., $1.5 million spent on new
laptops for employees).
• Other ways to report non-compensation elements?
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Roles and Responsibilities
Human Resources
Management
Top Management
Design*
Recommend pay
adjustment
amount**
Compensation
philosophy
Administration
Setting
compensation**
Lead, lag or match
the market
Fairness
Evaluating
performance for
compensation
purposes
Distribution of total
compensation**
Budgeted salary and
benefits dollars
*With guidance from top management
** With guidance from HR
(Byars & Rue, 2004; Mathis & Jackson, 2006)
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How Do Organizations Determine What to Pay
Employees?
•
•
•
•
•
Internal compensation philosophy.
Internal job worth.
Market competitiveness.
Market conditions.
Internal budget.
(Henderson, 2006)
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Wage and Salary Surveys (Market Research)
Wage and salary surveys are surveys of pay
practices of selected organizations, possibly
within a geographic area and/or a specific
industry.
> Concerned with external equity.
> Can conduct your own survey or purchase
survey data.
(Henderson, 2006)
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A Word of Caution About Salary Surveys
•
•
•
•
•
•
•
Job matching.
Misunderstandings and limited information.
Relevant data.
Integrating market data with job evaluation.
Hidden agendas.
Don’t typically encompass total rewards.
Costly.
(Henderson, 2006)
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Job Evaluation
• A process to determine the value of a job in
relation to other jobs within an organization.
• Concerned with internal equity.
• Used to develop pay grades and ranges.
• Involves the identification and use of
compensable factors (factors that are
important to the organization and used to
differentiate the value of each job to the
organization).
> Examples of compensable factors include skill,
responsibility, effort, managerial responsibility and
working conditions.
(Henderson, 2006)
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Terminology
Term
Definition
Job evaluation
A process to determine the value of each job
in relation to other jobs within an organization.
Job analysis
A systemic way to gather information about
what people do in their jobs and what is
needed to be successful in the job.
Job description
A written report of what a worker actually
does, how and where a worker does it, and
why.
Job specification
A written report of the knowledge, skills,
abilities and other characteristics (KSAOs)
needed to successfully perform the job.
Performance
evaluation
An assessment of how well an employee
performs the job relative to a set of standards
or expectations.
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Pay Ranges
Wage and salary surveys/market research +
job evaluation = pay ranges.
Pay ranges are a range of permissible pay for
a job or grade of jobs with a minimum, a
midpoint and a maximum.
(Henderson, 2006)
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Compensation Philosophy and Management
• Seniority-based.
• Cost of living/across the board.
• Performance-based.
>  performance =  pay (increases).
> No link between pay and seniority.
> Requires good performance
measurement/appraisal systems.
(Henderson, 2006)
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Compensation Philosophy and Management
Example Merit Increase Matrix
When Based on Performance
Performance
Rating
Poor
Needs
Improvement
Satisfactory
Very Good
Outstanding
Merit
Increase
0%
0%
4%
5%
7%
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Federal Law and Compensation Systems
• Fair Labor Standards Act (FLSA):
> Federal minimum wage.
> Overtime.
> Exempt vs. nonexempt.
• Equal Pay Act:
> Title VII of the Civil Rights Act of 1964 also
applies to pay.
(Henderson, 2006)
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Federal Law and Compensation Systems
• Employee Retirement Income Security Act
(ERISA):
> Applies to pension/retirement benefits
plans.
• Consolidated Omnibus Budget Reconciliation
Act (COBRA):
> Health care insurance continuation.
• Health Insurance Portability and Accountability
Act (HIPAA).
(Henderson, 2006)
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Federal Law and Compensation Systems
The Patient Protection and Affordable Care Act
of 2010
• Signed into law March 23, 2010, by President
Obama, the Act is the most significant change to
health care law since the 1965 creation of
Medicare and Medicaid.
• The Act does not require employers to provide
health care coverage to employees, but it does
provide incentives and penalties to encourage it.
• The Act will take eight years to fully be
implemented and many of the provisions have yet
to be fleshed out through regulatory guidance.
(SHRM, 2010)
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Federal Law and Compensation Systems
The Patient Protection and Affordable Care Act
of 2010
• Employers who had health care plans in effect on
the date of the law’s enactment are considered
“grandfathered” and their employer options differ
from plans established after enactment.
• Starting in 2010, all health care plans must offer:
> Coverage for young adults.
> No cap on lifetime benefits.
> No limit on pre-existing conditions.
> Automatic coverage.
(Kushner, 2010)
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Federal Law and Compensation Systems
The Patient Protection and Affordable Care Act
of 2010
• State-created health insurance exchanges
(SHOPs).
• Employer penalties.
• Employer incentives.
(Kushner, 2010)
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References
Byars, L.L., & Rue, L.W. (2004). Human resource
management, 7th edition. New York: The McGrawHill Companies, Inc.
Henderson, R.I. (2006). Compensation management
in a knowledge-based world, 10th edition. New
Jersey: Pearson Education, Inc.
Mathis, R.L., & Jackson, J.H. (2006). Human
resource management, 11th edition. Ohio: SouthWestern.
U.S. Bureau of Labor Statistics (March 10, 2010).
Employer Costs for Employee Compensation.
Economic News Release.
WorldatWork (2008). Total rewards model.
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