Compensation and BenefitsSubtitle

Pay Structures• A company's pay structure is the method of administering its pay

philosophy.

• Elements:

Levels and reporting relationships

Differentials

• The two leading types of pay structures are:

internal equity method

market pricing

Internal equity method

• Uses a tightly constructed grid to ensure that each job is compensated according to the jobs above and below it in a hierarchy

• Is all about the fairness of the equity structure

• Ranking of jobs in the organization

Market pricing

• Each job in an organization is tied to the prevailing market rate

• People are compensated in relation to the market value of their job, regardless of their level in the organization

• determining the competitive worth of a position

Methods of Compensation Payments

• There are two forms of compensation provided to employees; direct and indirect.  Direct forms of compensation have a multitude of types or methods, from salaries to bonuses.  Indirect compensation is primarily the various types of benefits and long term incentives. 

• One of the forms of compensation is direct remuneration for services rendered by the employee.  The term used for this is wages.  It consists of four different groups of payment from the employer to the employee.  They are salary, hourly, commission and bonus types of wages.

Direct Forms of Compensation

• Salary

This type of wage is customarily a set sum of remuneration over a defined period of time.  The most traditional form is a dollar amount over a period of one year.  The frequency of payment is another part of the compensation and is based on industry standards.  Most businesses pay for services twice a month. 

Most commonly used tool to pay professional or licensed employees.  In general there is an expectation from the employer of a longer term commitment from the employee for providing a regular uninterrupted compensation.

• Hourly

This is a peso amount per hour of service to the employer, more commonly used to compensate unskilled and skilled laborers in the workforce.  This form of compensation comes with an implied understanding that during times of slow or minimal workloads, the employee may not be used to provide services.  In effect, there is no guarantee of a regular cycle of pay.

• Commission

When compensation is based on volume or some form of performance, this is known as commission based remuneration.  Other terms used include piecework or piecemeal.  Many industries used this type of remuneration to get a minimum standard of production in exchange for compensation.  It is used to shift risk from the employer to the employee.  There are two methods to calculate commission.  One is based on volume of services and the other is based on sales.

• Bonuses

• Bonuses are used to increase performance from the employee.  This is a variable type of remuneration and is more commonly found with salaried staff to incentivize them for a particular goal whether time or volume based.  Other reasons used for bonuses are to increase or maintain retention of certain skills or the pool of skillsets needed in the company.   Sometimes bonuses are paid when a company meets certain financial standards or goals over an extended period of time.

Bonuses are not commonly used with hourly or commission based employees due to the nature of the type of compensation already established.  However, in small businesses it is used as a tool to incentivize these two types of remuneration to meet certain goals.

Indirect Forms of Compensation

• The other form of compensation is indirect in value.  This includes benefits and equity based programs.  In general, these two types of indirect compensation provide value to an employee over a longer period of time. 

• Benefits

This particular group is traditionally thought of in the form of insurances (health, dental, life, disability and vision) and retirement.  Very few small businesses provide benefits to their employees due to cost involved.  When small businesses begin providing benefits, they customarily start out with retirement because of simplicity and low cost.  As they grow, they add health insurance and continue to expand the benefit package as the number of employees increase and the risk of business performance decreases.  Benefits allow for retention and recruitment.

Other benefits can include transportation, paid time off, vacation time, and customized incentives (lodging, meals, phones, etc.).

• Equity Based Programs

Rarely found in the small business world for several reasons.  These types of indirect compensation tie the employee to the company via ownership.  Due to the complexity and the legal issues involved, very few small businesses use this tool.  This is a sophisticated method to retain key employees and is discussed in another article.

Legal Requirements For Pay

Wages

• Or pay, is remuneration for services rendered.

• Are protected by certain laws, regulations, and ordinances as to their amount, manner of giving, and time of giving.

• Can be increased or subject to multiplier under certain conditions.

• Must be paid wholly in the legal tender of the Philippines.

Minimum Wage

• Is the lowest any regular employee can be paid as a salary.

• Changes from region to region, as well as by nature of work, factoring in cost of living.

• Is exempt from income tax.

• Varies from a low of 200 to a high of 481.

Overtime Pay

• Is the additional payment given to those employees in recompense of hours worked beyond the standard eight-hour workday.

• Is calculated by multiplying a fixed overtime rate, which may vary, by the number of extra hours worked.

• Includes also all hours worked on non-working holidays and designated rest days.

• Cannot be offset against undertime.

• Need not be continuous.

• Generally applies to all employees of all types. Some exceptions.

Night Differential

• All work done between at latest 10:00 P.M. and at earliest 6:00 A.M. is subject to an increase in pay, calculated similarly to overtime pay.

Hazard Pay

• Is compensation for hours worked under great physical discomfort distress, or otherwise physical hardship.

• Can also apply to jobs with the mere risk of physical distress or hardship.

• Calculated in a manner similar to overtime and night differential.

• Overtime pay, night differential, and hazard pay are all generally tax-exempt in the same manner minimum wage is.

Thirteenth Month Pay

• Is one month’s worth of basic salary, given to all regular rank-and-file employees at the end of the year, provided they had worked at least one month during the same.

• Is generally mandatory in application, but excludes certain government offices and other working environments.

What are the Government-mandated Benefits?• SSS Contributions

• Contribution to National Health Insurance Program

• Contribution to Home Development and Mutual Fund

• The 13th Month Pay

• Service Incentive Leave

• Meal and Rest Periods

Social Security System• The social security system is aimed at providing protection for the

SSS member against socially recognized hazard conditions, such as sickness, disability, maternity, old age and death, or other such contingencies not stated but resulted in loss of income or results to a financial burden. The employee and his/her employer(s) are to contribute for the social security benefits of the said employee in accordance to a given schedule by the Philippine Social Security System. Monthly employee contribution depends on the employee’s actual monthly salary.

Contribution to National Health Insurance Program• The employee and his/her employer(s) are to contribute for the

medical insurance of the said employee in accordance to the Republic Act 7835 on Medicare Program which is administered by the Philippine Health Insurance Corporation (Philhealth). Monthly employee contribution depends on the employee’s actual monthly salary.

Contribution to Home Development and Mutual Fund• The employer(s) is required to contribute per month not less than

P100.00 to the employee’s Home Development and Mutual Fund. In accordance to the periodic remittance schedule provided by HDMF, the employer(s) will remit this contribution, in addition to that of the employee’s, which is to be deducted from his/her payroll

The 13th Month Pay• As mandated by the Presidential Decree No. 851, the employee

shall receive a bonus salary equivalent to one (1) month, regardless of the nature of his/her employment, not later than December 24 of every year.

Service Incentive Leave• Book III, Chapter III of the Labor Code of the Philippines covers the

employee’s benefit for Service Incentive Leaves. According to Article 95, an employee who has rendered at least one year of service is entitled to a yearly five days service incentive leave with pay.

Meal and Rest Period• Employees are provided a one-hour employee benefit for regular

meals, when working on an eight (8 hour) stretch. Employees are also provided adequate rest periods in the morning and afternoon which shall be counted as hours worked.

Non-government mandated benefits

Overview of Non-Mandated Benefits

• Paid Leave & On-Job Paid Time Off

• Health Care

• Income Protection

• Retirement Plans

• Employee Services

Retirement and Savings Plan Payments

• Employees rank pensions in top three of all benefits in terms of importance

• Defined benefit plans, or…

• Defined contribution plans

• Individual Retirement Accounts (IRAs)

• Retirement plans covered by Employee Retirement Income Security Act (ERISA)

Defined benefit plans

• Employer provides a specific pension level defined in terms of:

– Fixed dollar amount or

– Percentage-of-earnings amount that may vary with years of seniority

• Employer finances this obligation by: – Following an actuarially determined benefits formula and – Making current payments that will yield the future pension benefit for a retiring employee

Defined contribution plans

• Require specific contributions by employer

• Final benefit received by employees is unknown – Dependent on investment success of plan manager

• Three popular forms of these plans – 401 (k) plan – Employee Stock Ownership Plan (ESOP) – Profit sharing

• Can be considered a defined contribution plan if distribution of profits is delayed until retirement

• Cash balance plans are a hybrid of defined benefit and defined contribution plans

Individual Retirement Accounts (IRAs)

• Tax-favored retirement savings plan that individuals can establish themselves – IRAs are used mostly to store wealth accumulated in other retirement vehicles, rather than as a way to build new wealth

Employee Retirement Income Security Act (ERISA, 1974)

• ERISA is a federal law that sets minimum standards for pension plans in private industry.  For example, if an employer maintains a pension plan, ERISA specifies when an employee must be allowed to become a participant, how long they have to work before they have a nonforfeitable interest in their pension, how long a participant can be away from their job before it might affect their benefit, and whether their spouse has a right to part of their pension in the event of their death.

ERISA

• Eligibility: Employees at least 21 years old – Employers may require 6 months of service as a precondition for participation

• Vesting: Length of time employee must work for employer before entitled to employer payments to plan – Any contributions made by an employee to a pension fund are immediately and irrevocably vested – Employer’s contribution must vest according to two formulas

Characteristics of Qualified Plans To qualify under ERISA, a pension plan must:

• Characteristics of Qualified Plans To qualify under ERISA, a pension plan must:

• Be in writing and be communicated to employees

• Be established for the exclusive benefit of employees or their beneficiaries

• Satisfy certain rules concerning eligibility, vesting, and funding

• Not discriminate in favor of officers, shareholders, or highly compensated employees.

Qualified plans

• Tax Benefits:

• A for-profit employer receives an immediate tax deduction for contributions

• Employee’s earnings accumulate tax deferred; employee pays taxes on the funds only when the benefits are received

Income Protection: Life Insurance

• One of the most common employee benefits

• 87% of medium and large companies offer life insurance

• Most companies offer term policies – Value of one to two times an employee’s salary – Most plan premiums paid completely by employer – Varying amounts of additional coverage often an option

Paid Time Off During Working Hours

• Rest periods

• Lunch periods

• Wash-up time

• Travel

• Clothes-change time

• Get-ready time

Pay for Time Not Worked

• Paid vacations and payments in lieu of vacation

• Payments for holidays not worked

• Paid sick leave

• Other –

National Guard – Army, or other Reserve duty – Jury duty – Voting pay allowances – Personal reasons