Employee Compensation
Employee Compensation tests the mechanics of pay structures, market pricing, pay compliance, and variable pay. Expect calculations involving compa-ratio, range penetration, overtime, and merit budgets, plus FLSA classification issues.
FLSA and pay compliance
The FLSA requires overtime at 1.5 times the regular rate for non-exempt employees after 40 hours in a workweek. Exempt status generally requires the salary-basis test and the duties test; the federal salary threshold has been $684 per week under the 2019 rule, but always confirm the current DOL figure because it changes. The regular rate includes nondiscretionary bonuses, shift differentials, and production pay; it generally excludes discretionary bonuses and expense reimbursements. Equal pay, pay transparency, and state wage laws also shape practice.
Structures and market pricing
Job evaluation establishes internal value through ranking, classification, or point-factor methods. Market pricing matches benchmark jobs to survey data, aging the data to the effective date and applying geographic differentials. Pay structures use grades and ranges with a minimum, midpoint, and maximum. Range spread is the range width divided by the minimum. Midpoint progression shows the percentage difference between successive grade midpoints. Compa-ratio equals salary divided by midpoint. Range penetration equals salary minus minimum, divided by maximum minus minimum. A merit matrix combines performance rating and compa-ratio to allocate a budget.
Variable pay
Variable pay includes annual bonuses, sales commissions, gainsharing, and profit sharing. Sales plans use quotas, commission rates, accelerators above quota, decelerators below quota, and sometimes caps. Gainsharing rewards group productivity or cost savings; profit sharing links pay to organizational profitability.
Worked example
A pay range runs from $50,000 to $70,000, with a midpoint of $60,000. An employee earns $54,000. Compa-ratio is $54,000 / $60,000 = 0.90, or 90%. Range penetration is ($54,000 - $50,000) / ($70,000 - $50,000) = 4,000 / 20,000 = 20%. If the merit matrix awards 4% for an above-target rating at a compa-ratio below 0.90, the increase is $2,160; the new salary is $56,160, and the new compa-ratio is 93.6%.
Traps that cost marks
Do not use base salary as the regular rate when nondiscretionary bonuses must be included. Do not misclassify employees as exempt without the salary and duties tests. Do not confuse compa-ratio with range penetration. Do not use an unaged market midpoint. Do not assume salaried non-exempt employees are exempt from overtime.