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EMPLOYEE COMPENSATION
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Compensation is a primary motivator for employees. People look for jobs that not only suit their
creativity and talents, but compensate them-both in terms of salary and other benefits-
accordingly. Compensation is also one of the fastest changing fields in Human Resources, as
companies continue to investigate various ways of rewarding employees for performance.

DETERMINING WAGES AND SALARIES

It is important for small business owners to understand the difference between wages and
salaries. A wage is based on hours worked. Employees who receive a wage are often called
"non-exempt." A salary is an amount paid for a particular job, regardless of hours worked, and
these employees are called "exempt." The difference between the two is carefully defined by the
type of position and the kinds of tasks that employees perform. In general, exempt employees
include executives, administrative and professional employees, and others as defined by the Fair
Labor Standards Act of 1938. These groups are not covered by minimum wage provisions. Non-
exempt employees are covered by minimum wage as well as other provisions.

It is important to pay careful attention to these definitions when determining whether an

individual is to receive a wage or a salary. Improper classification of a position can not only pose
legal problems, but often results in employee dissatisfaction, especially if the employee believes
that execution of the responsibilities and duties of the position warrant greater compensation than
is currently awarded.

When setting the level of an employee's monetary compensation, several factors must be
considered. First and foremost, wages must be set high enough to motivate and attract good
employees. They must also be equitable-that is, the wage must accurately reflect the value of the
labor performed. In order to determine salaries or wages that are both equitable for employees
and sustainable for companies, businesses must first make certain that they understand the
responsibilities and requirements of the position under review. The next step is to review
prevailing rates and classifications for similar jobs. This process requires research of the
competitive rate for a particular job within a given geographical area. Wage surveys can be
helpful in defining wage and salary structures, but these should be undertaken by a professional
(when possible) to achieve the most accurate results. In addition, professional wage surveys can
sometimes be found through local employment bureaus or in the pages of trade publications. Job
analysis not only helps to set wages and salaries, but ties into several other Human Resource
functions such as hiring, training, and performance appraisal. As the job is defined, a wage can
be determined and the needs for hiring and training can be evaluated. The evaluation criteria for
performance appraisal can also be constructed as the specific responsibilities of a position are
defined.

Other factors to consider when settling on a salary for a position include:

 Availability of people capable of fulfilling the obligations and responsibilities of the job
 Level of demand elsewhere in the community and/or industry for prospective employees
 Cost of living in the area
 Attractiveness of the community in which the company operates
 Compensation levels already in existence elsewhere in the company

COMPENSATION LAWS
There are many federal, state, and local employment and tax laws that impact compensation.
These laws define certain aspects of pay, influence how much pay a person may receive, and
shape general benefits plans.

The Fair Labor Standards Act (FLSA) is probably the most important piece of compensation
legislation. Small business owners should be thoroughly familiar with it. This act contains five
major compensation laws governing minimum wage, overtime pay, equal pay, recordkeeping
requirement, and child labor, and it has been amended on several occasions over the years. Most
of the regulations set out in the FLSA impact non-exempt employees, but this is not true across
the board.

The Equal Pay Act of 1963 is an amendment to FLSA, which prohibits differences in
compensation based on sex for men and women in the same workplace whose jobs are similar. It
does not prohibit seniority systems, merit systems, or systems that pay for performance, and it
does not consider exempt or non-exempt status.
In addition, the United States government has passed several other laws that have had an impact,
in one way or another, on compensation issues. These include the Consumer Credit Protection
Act of 1968, which deals with wage garnishments; the Employee Retirement Income Security Act
of 1974 (ERISA), which regulates pension programs; the Old Age, Survivors, Disability and
Health Insurance Program (OASDHI), which forms the basis for most benefits programs; and
implementation of unemployment insurance, equal employment, worker's comp, Social Security,
Medicare, and Medicaid programs and laws.

TRADITIONAL COMPENSATION
For the most part, traditional methods of compensation involve set pay levels (wage or salary)
with regular increases. Increases can be given for a variety of reasons, but are typically given for
promotions, merit increases, or cost of living increases. The Hay Group points out that there is
less distinction today between merit increases and cost of living increases: "Because of the low
levels (3 to 4 percent) of salary budget funding, most merit raises are perceived as little more
than cost of living increases. Employees have come to expect them." This "base pay" system is
one that most people are familiar with. Often, it includes a set salary or wage, a set schedule for
merit increases, and a set benefits package.

BENEFITS
Benefits are an important part of an employee's total compensation package. Benefits packages
became popular after World War II, when wage controls made it more difficult to give
competitive salaries. Benefits were added to monetary compensation to attract, retain, and
motivate employees, and they still perform that function today. They are not cash rewards, but
they do have monetary value (for example, spiraling health care costs make health benefits
particularly essential to today's families). Many of these benefits are nontaxable to the employee
and deductible by the employer.

Many benefits are not required by law, but are nonetheless common in total compensation
packages. These include health insurance, accidental death and dismemberment insurance, some
form of retirement plan (including profit-sharing, stock option programs, 401(k) and employee
stock ownership plans), vacation and holiday pay, and sick leave. Companies may also offer
various services, such as day care, to employees, either free or at a reduced cost. It is also
common to provide employees with discounted services or products offered by the company
itself. In addition, there are also certain benefits that are required by either state or federal law.
Federal law, for example, requires the employer to pay into Social Security, and unemployment
insurance is mandated under OASDHI. State laws govern worker's compensation.

CHANGES IN COMPENSATION SYSTEMS

As businesses change their focus, their approach to compensation must change as well.
Traditional compensation methods may hold a company back from adequately rewarding its best
workers. When compensation is tied to a base salary and a position, there is little flexibility in
the reward system. Some new compensation systems, on the other hand, focus on reward for
skills and performance, with the work force sharing in company profit or loss. One core belief of
new compensation policies is that as employees become employee owners, they are likely to
work harder to ensure the success of the company. Indeed, programs that promote employee
ownership-and thus employee responsibility and emotional investment-are becoming
increasingly popular. Examples of these types of programs include gain sharing, in which
employees earn bonuses by finding ways to save the company money; pay for knowledge, in
which compensation is based on job knowledge and skill rather than on position (and in which
employees can increase base pay by learning a variety of jobs); and incentive plans such as
employee stock options plans (ESOPs).

PAY FOR PERFORMANCE Probably the most popular of the newer concepts in compensation is
the easiest to understand-compensation based on performance. These programs, sometimes
referred to as variable pay programs, generally offer compensation incentives based on employee
performance or on the performance of a team. Pay for performance rewards high performance
and does not reward mediocre or low performance, and is the definition of the "merit" system.

In a true merit based system, there are a few conditions which must be satisfied for it to be
meaningful:

 Employees must have control over their performance. If employees are overly dependent
on the actions and output of other employees or processes, they may have little control
over their own performance.
 Differences in performance must mean something to the business. If there is little
difference between a high performer and a mediocre one, merit pay won't work.
 Performance must be measured regularly and reliably. A clear system of performance
appraisal, with defined criteria that are understood by the employee and regularly
scheduled meetings must be in place.

ADMINISTERING COMPENSATION PROGRAMS

Compensation programs and policies must be communicated clearly and thoroughly to
employees. Employees naturally want to have a clear understanding of what they can reasonably
expect in terms of compensation (both in terms of monetary compensation and benefits) and
performance appraisal. To ensure that this takes place, consultants urge business owners to detail
all aspects of their compensation programs in writing. Taking this step not only helps reassure
employees, but also provides the owner with additional legal protection from unfair labor
practices accusations

Advantages and disadvantages of staff

welfare schemes?
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The advantages of a welfare state system includes;

-There is a supreme percentage decrease in homelessness.

-There is also a fall in crime rates.

-Provides basic living needs for single parents,sufferers and disabled ( basic apartment payed for
by government (partially taxpayers money), transport payed for and 45 pound a week.

The disadvantages of a welfare state system includes;

-A person can recieve payment without working or contributing to society eg. charity work.

-It can demean a childs inspirations to achieve to earn money as they know they will end up with
money.

Employee Welfare Benefit Plan

AUGUST 16, 2006 · POSTED IN WELFARE BENEFIT PLANS 

The terms “employee welfare benefit plan” and “welfare plan” mean any plan, fund, or program established or
maintained by an employer or by an employee organization, or by both, to the extent that such plan, fund, or
program was established or is maintained for the purpose of providing for its participants or their beneficiaries,
through the purchase of insurance or otherwise, (A) medical, surgical, or hospital care or benefits, or benefits in the
event of sickness, accident, disability, death or unemployment, or vacation benefits, apprenticeship or other training
programs, or day care centers, scholarship funds, or prepaid legal services, or (B) any benefit described in section
186(c) of this title [Title 29] (other than pensions on retirement or death, and insurance to provide such pensions).

As noted by Justice Souter, ERISA’s definition of an employee welfare benefit plan is ultimately circular. Thus, [o]ne
is thus left to the common understanding of the word “plan” as referring to a scheme decided upon in advance
. . . Here the scheme comprises a set of rules that define the rights of a beneficiary and provide for their
enforcement. Rules governing collection of premiums, definition of benefits, submission of claims, and resolution of
disagreements over entitlement to services are the sorts of provisions that constitute a plan. See Hansen v.
Continental Ins. Co., 940 F.2d 971, 977 (C.A.5 1991).” Pegram v. Herdrich, 530 U.S. 211, 120 S.Ct. 2143 (2000).