Compensation Issues
Compensation items test pay equity logic, job evaluation, pay structure mechanics, required versus discretionary benefits, and FLSA overtime arithmetic.
Equity
Equity theory drives pay design: internal equity (fairness across jobs, built through job evaluation), external equity (market competitiveness, from pay surveys), individual equity (differences among people in the same job), and procedural equity (fairness of the process used).
Job evaluation and structure
Job evaluation prices jobs, not people. Methods: ranking, classification (grade descriptions), point factor (compensable factors weighted into points-most defensible), and factor comparison. Pay surveys set the market line; the structure uses grades with minimum, midpoint, and maximum. Compa-ratio = salary ÷ midpoint; 1.00 means paid at market, and a ratio well below midpoint (often under 0.80) draws attention.
Pay for performance
Merit pay raises base; piece rates pay per unit; commissions pay per sale; gainsharing shares productivity savings; profit sharing shares profit; ESOPs share ownership; skill-based pay rewards certified competencies. Variable pay does not permanently raise fixed costs.
Required benefits and FLSA
Social Security, Medicare, unemployment insurance, and workers' compensation are mandated. FLSA sets minimum wage and overtime at 1.5× the regular rate above 40 hours a week for non-exempt employees, and the regular rate includes nondiscretionary bonuses. ERISA governs pension and welfare plans; COBRA requires continuation coverage.
Worked example
An employee earns $600 for a 40-hour week plus a $260 quarterly production bonus that is nondiscretionary. Allocate the bonus: $260 ÷ 13 weeks = $20 per week. Regular rate = ($600 + $20) ÷ 40 = $15.50. In a week of 44 hours, overtime pay = 1.5 × $15.50 × 4 = $93, and total pay = $620 + $93 = $713. The reasoning: the bonus raises the regular rate, and overtime is computed on hours over 40. A discretionary bonus may be excluded from the regular rate.
Traps that cost marks
- Confusing job evaluation with performance appraisal.
- Treating a compa-ratio of 0.95 as underpayment by itself.
- Paying overtime at 1.5× base hourly pay while ignoring bonuses.
- Classifying an employee exempt without the salary and duties tests.
- Listing FMLA as a pay benefit; it is unpaid leave.