Compensation and Benefits Administration
This domain tests the mechanics of building pay structures, defending pay decisions, and administering benefits. Expect calculations (compa-ratio, range penetration) and judgment questions about internal equity versus external competitiveness.
Core rules
- Two anchors: internal equity is built through job evaluation (ranking, classification, point-factor); external competitiveness is built through market surveys and market pricing. A pay structure reconciles both.
- Structure vocabulary: pay grade (a grouping of jobs), pay range (minimum, midpoint, maximum), midpoint (usually the market rate for a fully competent performer), range spread (maximum minus minimum, commonly 40–50% for hourly and wider for managerial roles), and overlap between adjacent grades.
- Position in range: compa-ratio = salary ÷ midpoint, where below 1.0 means paid under midpoint. Range penetration = (salary − minimum) ÷ (maximum − minimum) and can exceed 100% for red-circled or long-service employees.
- Compression and inversion: pay compression occurs when new hires approach or exceed experienced incumbents; inversion occurs when a subordinate earns more than the supervisor.
- Variable pay: merit increases, lump-sum bonuses, gainsharing (Scanlon, Rucker), profit-sharing, and sales incentives, each tied to a different performance unit.
- Benefits: legally required items (Social Security, Medicare, FUTA/SUTA, workers' compensation), ERISA-governed plans, COBRA continuation (up to 102% of cost), HIPAA privacy, ACA affordability and reporting, and retirement plans (defined benefit versus defined contribution, with vesting schedules).
- Section 125 cafeteria plans allow pre-tax premiums and FSAs; HSAs require a qualifying high-deductible health plan.
Worked example
An employee earns $52,000 in a grade with minimum $45,000, midpoint $60,000, and maximum $75,000. Compa-ratio = 52,000 ÷ 60,000 = 0.87, so the employee is 13% below midpoint. Range penetration = (52,000 − 45,000) ÷ (75,000 − 45,000) = 7,000 ÷ 30,000 = 23%. Interpretation: the employee sits in the lower quarter of the range and below midpoint, which signals a review of performance, time in grade, and market movement before the next increase is set.
Traps that cost marks
- Mixing compa-ratio (against midpoint) with range penetration (against the range floor).
- Using the market median as the midpoint without applying the employer's stated competitive policy (lead, match, lag).
- Calling a bonus a merit increase when it is not added to base pay.
- Assuming COBRA coverage is free to the former employee.