BUS301 Study Guide

Unit 6: Compensation and Benefits

6a. Identify and apply the concepts/issues associated with compensation and benefits to create an attractive environment that draws valuable resources to an organization

  • What is the purpose of a compensation plan?
  • Define a market compensation policy.
  • Define a market plus and market minus compensation philosophy.
  • Give an example of an internal pay factor and an external pay factor for determining compensation.
  • What types of compensation, other than pay, might be part of a compensation package?
  • Describe how employers perform a job evaluation to determine the relative worth of jobs to create an appropriate pay structure for employee compensation.
  • Describe job ranking, paired comparison system, point-factor system, compensable factors, Hay profile method.
  • Define job classification system
  • Describe equity theory and explain how this concept relates to fairness and motivation.
  • Define expectancy theory and reinforcement theory
  • Define pay grading and delayering and banding process
  • Define skill-based pay.

HRM creates compensation plans to attract, retain, and motivate employees to work at their peak performance and improve morale. Employees who believe they are fairly compensated tend to contribute more and provide better customer service, promoting organizational growth and development in the business community.

A business with a market compensation policy pays the going market rate for a particular job based on research and salary studies.

Businesses adopt a market plus philosophy by adding a percentage increase to the going rate. For example, if the job category shows a median salary of $57,000, a business with a five percent market plus philosophy pays $59,850.

A business with a market minus philosophy pays a percentage rate lower than the market rate. For example, If the job category shows a median salary of $57,000, a business with a five percent market minus philosophy pays $54,150 for the same job.

Internal pay factors may include the employer's ability to pay, the type of industry, and the business strategy. HRM may consider the number of skilled workers the company needs to hire versus the existing skills levels in the company, how much the company values its employees and what it needs to accomplish, and the job evaluation and performance appraisal system, such as differential pay for different jobs or performance-based pay. Employees can also influence their compensation in the areas of performance, experience, and potential. Other factors include whether the employees receive other financial incentives, such as a percentage of sales (commission) or an annual performance-based bonus.

External pay factors may include the economy's general state, the inflation rate, the area's general cost of living, or the pay rate competing companies are offering in the area.

A market compensation policy's goal is to pay the going rate for a particular job, within a particular market, based on research and salary studies. Other external pay factors include the relevant labor market, productivity (influenced by new technologies, new methods, and better management techniques), cost of living index, the existence of a labor union, and applicable labor laws.

A compensation plan refers to all of the components of a compensation package, including how the business pays its employees and offers bonuses, salary increases, and other incentives. In addition to a paycheck, compensation can include other financial incentives, such as bonuses, profit-sharing, stock options, and other compensation types. Benefits can include group health insurance, dental insurance, vision plans, disability insurance, life insurance, flexible spending accounts, retirement and 401K plans, vacation and sick leave, family and medical leave, childcare benefits, wellness benefits, and education tuition stipends.

A job evaluation helps businesses determine the relative worth of their positions to determine an appropriate pay structure. How valuable is each position in terms of helping the business achieve its goals? A job evaluation can help determine whether the pay it offers is equitable and fair among its employees.

There are several ways to perform a job evaluation.

Job ranking lists the job titles and ranks them in order of importance to the organization.

A paired comparison system compares individual jobs with every other position, based on a ranking system, and assigns an overall score to each job, from the highest-valued to the lowest-valued position.

A point-factor job evaluation system determines the relative value of each position at a company via a point system. HRM calls the points it gives to each specific job compensable factor. Each compensable factor receives a weight, which allows HRM to compares the relative importance of this skill or ability to the organization. HRM applies this system to every position in the organization: listing compensable factors for each job and the corresponding points to determine which jobs are most important to the company.

Examples of compensable factors include leadership ability, knowledge, autonomy, supervision, psychological demands, interpersonal skills, internal and external contacts, to specific skills and responsibilities required to perform each job.

The Hay profile job evaluation method is a proprietary classification that focuses on three factors: know-how, problem-solving, and accountability. The process establishes a point value for characteristics that reflect each job and uses job descriptions to evaluate jobs and determine compensation. The system is quantitative, but it can be time-consuming and expensive to perform an elaborate job evaluation.

In a job classification system, positions are categorized and grouped based on the knowledge and skills required for the job, years of experience, and the amount of authority required to perform the job. The U.S. military, federal government, and most state governments use this system, which ties basic function, characteristics, and typical work of the job classification, in addition to pay range data, to each position.

Example of a Paired Comparison for a Job Evaluation

In this example, based on the paired ranking system, the sales director should have a higher salary than the project administrative assistant because the job receives a higher ranking. Likewise, a receptionist should be paid less than the project administrative assistant because this job ranks lower.












0 = 4th






1 = 3rd






3 = 2nd






6 = 1st

After completing a job evaluation, HRM engages in pay grading, delayering, and banding.

Pay grading refers to creating a pay scale for specific positions or types of jobs. HRM begins by creating a variety of pay grade levels and assigning each position a pay grade. Employee raises stay within the range of their individual pay grade until they receive a promotion, which may push them into a higher pay grade. Employers can add percentages to reflect the cost of living for employees who work in more expensive areas. The advantage of this system is that it is fair. However, a pay grading system can affect employee motivation since they are not rewarded for working harder.

Companies who want hierarchical levels and more agility may adopt a delayering and banding process, which reduces the number of pay levels, creates a broader pay range and provides more flexibility within each level. Managers can reward performance but maintain a basic model for hiring managers to follow.

In a skill-based pay system, HRM bases salary levels on an employee's skills rather than their job title. Similar to the pay grade model, HRM assigns a particular pay grade to a set of skills.

In a competency-based pay system, HRM bases salary levels on an employee's traits or characteristics, focusing on what the employee can become instead of the skills they already have.

Broadbanding is similar to a pay grade system, except HRM assigns a specific pay rate to all positions in a particular category. For example, everyone working in customer service or all administrative assistants (regardless of department) are paid within the same general band. McDonald's uses this form of compensation in its corporate offices and says it allows for flexibility in pay, movement, and employee growth.

Equity theory is a motivational theory that says individuals base their satisfaction level on what others receive compared to themselves. In terms of compensation, employees can become less motivated to work hard if they learn a co-worker is earning more money, but they believe the other person is not working as hard as they are. An employee who believes the system is unfair may retaliate by reducing their own output or leaving the company.

Note that an employee's perception of fairness in compensation may not match reality compared to what others receive. They may not know the full story.

Expectancy theory is a motivational theory that says employees will put in as much work as they expect to receive in rewards. For example, if an employee believes they will be paid favorably, they will achieve the desired outcomes. If they believe the rewards will not equal their effort, they will not work as hard.

Reinforcement theory says that employees are more likely to perform the desired behavior to achieve the reward when HRM rewards high performance. However, if HRM does not reward employees for high performance, employees are less likely to perform the desired behavior. Some believe HRM should use bonus and commission plans to promote and reward desired behavior, rather than guarantee the reward as part of the employee's regular compensation.

Review Goals of a Compensation Plan, Developing a Compensation Package, Types of Pay Systems, and Other Types of Compensation.


6b. Identify key laws and legislation with regard to compensation and benefits that shape how human capital decisions should be made

  • Define comparable worth.
  • What does the Equal Pay Act of 1963 cover?
  • What is the purpose of the Equal Employment Opportunity Commission (EEOC)?
  • How did the Lilly Ledbetter Fair Pay Act of 2009 benefit people who wished to file an equal pay lawsuit to protest pay discrimination?
  • Describe three protections granted by the Fair Labor Standards Act (FLSA).
  • Describe the goals of the Federal Unemployment Tax Act (FUTA).
  • Describe the goals of the Federal Employees Compensation Act (FECA).

The concept of comparable worth states that employees who perform the same type of job should receive similar pay. However, in many industries, research shows that women who work in traditionally female-dominated jobs earn less than men in comparable male-dominated jobs. Note that comparable worth differs from the concept of "equal pay for equal work". The Equal Pay Act of 1963 makes it illegal for employers to pay different wages to men and women if they perform equal work in the same workplace.

In the United States, the Equal Employment Opportunity Commission (EEOC) is the federal agency responsible for enforcing civil rights and employment laws. The EEOC prohibits companies from discriminating based on age, color, disability, gender, national origin, race, or religion. Concerning employee recruitment, employers with at least 15 employees cannot discriminate based on age (40 years or older), disability, genetic information, national origin, sex, pregnancy, race, or religion. Most companies include an EEO statement in their job announcements.

President Barack Obama signed the Lilly Ledbetter Fair Pay Act of 2009 to amend Title VII of the Civil Rights Act of 1964. The Act states that the 180-day statute of limitations for filing an equal-pay lawsuit regarding pay discrimination resets with each discriminatory paycheck. The U.S. Supreme Court originally barred Lilly Ledbetter's discrimination claim because she made it after the statute of limitations had expired. The new Act allows workers to file pay discrimination lawsuits after the original 180-day statute of limitations.

The Fair Labor Standards Act (FLSA) of 1938 grants three protections:

  1. It introduced the 40-hour workweek for employees in non-exempt jobs and guaranteed time-and-a-half for overtime in certain non-exempt jobs;
  2. It established a national minimum wage;
  3. It prohibited most minors from being employed in "oppressive child labor".

The Federal Unemployment Tax Act (FUTA) provides unemployment compensation to workers who are terminated due to layoffs or fired without cause (through no fault of their own). Most employers pay a federal and state unemployment tax to support the payment of these unemployment benefits.

The Federal Employees Compensation Act (FECA) provides compensation benefits, such as disability, to federal employees injured in the performance of their jobs.

Review The Law and Recruitment, EEO Set of Laws and Types of Pay Systems, Laws Relating to Pay.


6c. Differentiate among direct financial compensation, indirect financial compensation, and non-financial compensation and give examples of each

  • Define direct financial compensation and give an example.
  • Define indirect financial compensation and give an example.
  • Define non-financial compensation and give an example.

Direct financial compensation refers to direct monetary payment to employees, such as salaries, wages, commissions, and bonuses.

Indirect financial compensation includes non-cash benefits, such as medical, dental, disability, and life insurance; paid holidays and sick days; retirement plans; stock options; profit-sharing programs; and other employee benefits, such as counseling, legal referral, career planning, wellness plans, and fitness club memberships.

Non-financial compensation does not have monetary value but creates value for employees in ways that stimulate their morale and improve their performance. These incentives may include pride in the company's mission, a sense of job security, recognition for achievements, and participation in training programs.

These three types of compensation convince current and potential employees that the company values their work and cares for them. A generous and understanding employer can foster company loyalty and motivation and help retain existing employees.

Types of Pay




Fixed compensation is calculated on a weekly, biweekly, or monthly basis. No extra pay for overtime work.


Employees are paid based on the number of hours they work.


Employees are paid based on the number of items they produce.

Incentive Plans


Employees may, or may not, receive a salary and will be paid extra, such as a percentage for every sale they make.


Extra pay for meeting or surpassing a predetermined goal. Bonus plans may include monetary compensation, time off, gift certificates, and other incentives.


Bonuses are paid to employees based on the amount of profit the organization earned during a given period.

Stock Options

Employees receive the right to purchase company stock at a particular rate. A stock option is different from when a company gives the actual stock outright – an option infers employees will buy the stock at a set rate, usually cheaper than the market rate.

Other Types of Compensation


These can include various options, such as sick leave, paid vacation time, health club memberships, and daycare services.


Most organizations provide health and dental care benefits to employees (the monthly fee is deducted from the employee's paycheck or provided at no charge). Also, many offer disability and life insurance benefits.

401(k) Plans

Many organizations provide retirement plans for employees. The company works with a financial organization to create a plan so employees can save money. Many companies "match" a percentage of what the employee contributes to the plan.

Review Types of Pay Systems and Other Types of Compensation.


Unit 6 Vocabulary

  • Broadbanding
  • Comparable worth
  • Compensable factors
  • Compensation plan
  • Competency-based pay
  • Delayering and banding process
  • Direct financial compensation
  • Equal Employment Opportunity Commission (EEOC)
  • Equal Pay Act of 1963
  • Equity theory
  • Expectancy theory
  • External pay factor
  • Federal Employees Compensation Act (FECA)
  • Fair Labor Standards Act (FLSA)
  • Federal Unemployment Tax Act (FUTA)
  • Hay profile job evaluation method
  • Indirect financial compensation
  • Internal pay factor
  • Job classification system
  • Job evaluation
  • Job ranking system
  • Lilly Ledbetter Fair Pay Act of 2009
  • Market compensation plan
  • Market minus compensation
  • Market plus compensation
  • Non-financial compensation
  • Pay grading
  • Paired comparison system
  • Point factor system
  • Reinforcement theory
  • Skill-based pay