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Comprehensive Guide to Employee Benefits and Compensation Plans

written by: •edited by: Jean Scheid•updated: 9/23/2011

Learn more about how to compensate your employees to increase retention and job satisfaction. Discover how to write superior compensation plans and avoid compliance problems. Take the mystery out of employee benefits and compensation plans with this in-depth guide.

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    Agreement on benefits makes for a happier work environment. While there is a tendency to lump the terms employee benefits and employee compensation together and consider them synonymous, the two are not identical. They are similar but different in that a benefit is something of value (but usually not monetary) that is offered to an employee in return for doing a particular job or performing specified services.

    Think of perks like vacation or holiday pay, insurance benefits and retirement and profit-sharing programs to better understand the definition of employee benefits. These benefits may be funded entirely by the employer or the employee may share a pre-determined portion of the cost.

    Employee benefits are typically available to full-time employees who are either exempt or non-exempt. These perks may or may not be available to part-time or seasonal employees depending on the company structure. Exempt employees usually receive a fixed salary, a lucrative benefits package, and a compensation package that includes overrides, commissions or bonuses. Most exempt employees do not receive any sort of overtime pay for any extra work done during the work week.

    Non-exempt employees, however, receive a fixed hourly wage but are entitled to overtime pay for working extra hours or shifts. While they also receive a benefits package, it is usually not as generous as those offered to exempt employees; these individuals may or may not receive any additional compensation such as commissions or bonuses.

    Employee compensation, on the other hand, is a monetary amount paid in exchange for work: salaries, wages, commissions, bonuses and so forth. In this case, the employer funds the entire cost.

    The cost of employee benefits and compensation is a cost of doing business, and as other prices of doing business increase, so does the accompanying cost of offering such programs. In fact, there is a fear that as the full implementation of Obamacare approaches in 2012, many companies may choose to stop offering benefits such as health insurance and risk paying the resultant fines. This is just one example of how government rules and regulations impact the final decision of a company as to what types of benefits and compensation packages to offer their employees and whether they opt to fund the programs themselves or require the employees to share in the costs.

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    Employee Benefits

    What benefits do your employees want most? The extent and type of benefits offered to employees differs widely from employer to employer and industry to industry. However, most employers recognize that the better the overall benefit package the higher the quality of employees they will attract. An attractive benefit package makes the difference between hiring or losing a prime candidate in most cases, and these same packages can play a vital role in retaining long-term, seasoned employees who might otherwise be lured to other companies.

    In addition to increasing employee retention, competitive benefits increase employee morale and job satisfaction. When employees are happy and satisfied, they produce more work. However, as the package becomes more complex, the employer faces the potential for compliance issues, and these potential obstacles must be considered as the plan is being formulated. Some typical inclusions in a benefits package could be:

    • Life insurance
    • Health insurance
    • Long term disability insurance
    • Dental or vision insurance
    • Dependent care assistance
    • Tuition reimbursement
    • Retirement plans

    Medical doctor Because of the increased cost of offering a robust plan to attract and retain employees, many employers are offering non-traditional options such as wellness programs or health club memberships to their employees. We'll take a close look at these later on; for now, let's look at some tips, techniques and ideas for creating outstanding benefit plans:

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    Employee Compensation and Bonuses

    An attractive compensation package improves retention. Employee compensation goes beyond a base salary or hourly wage. It also includes indirect compensation via sick leave or paid leave or non-monetary compensation such as employee of the month programs or other rewards and incentives.

    According to the Bureau of Labor Statistics (BLS), "Private industry employers spent an average of $28.13 per hour worked for employee compensation in June 2011. Total compensation costs for state and local government workers averaged $40.40 per hour worked in June 2011.Total compensation costs for civilian workers, which includes private industry and state and local government workers, averaged $29.98 per hour worked in June 2011." 1

    While employee benefits and compensation differ, they are similar in that both must be robust and competitive to help the employer attract and retain the highest caliber of employees. Above average benefits and compensation plans tell employees and prospective employees that the employer values work ethics, performance and longevity and rewards those who exhibit such qualities.

    In this section of our guide, we've collected articles that discuss some key issues to consider as you formulate and implement your employee compensation and bonus programs:

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    Salary

    Salary is important but so are non-monetary rewards. There are some jobs in which the employee receives commission only versus a salary; these are typically sales positions in various industries. Whether a salary is paid or not, it's important for the overall compensation plan to be lucrative enough to reward the individual fairly for his or her efforts. It costs less to retain a trained, seasoned employee than to recruit, hire and train a new employee. The small cost of salaries, commissions and bonuses must be weighed against the return on investment (ROI) and the costs of new hires.

    Many employers make the mistake of continually changing or modifying sales commission programs because the "salesperson is making too much money." This self-serving motivation on the employer's part typically leads to high turnover rates and decreased overall sales because newer employees do not have the skills or client rapport to perform at higher sales levels.

    Here's our guide to how to formulate and implement salary and compensation plans that are a win-win for everyone:

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    Paid Leave Benefits

    Paid time off improves employee productivity. The type of paid leave benefits varies from industry to industry and is predicated on factors such as the size of the company, whether it is a goods producing or service providing business, or whether it is a private industry or a state, local or federal entity. Some typical kinds of paid leave include:

    • Vacations
    • Holidays
    • Personal leave
    • Paid leave
    • Family leave
    • Sick leave

    The term paid leave is usually applied to a situation where the individual continues his or her employment but is granted time off with pay. Furloughs, on the other hand, refer to periods of absence from the employer's business for which the employer may or may not be compensated.

    Furloughs can occur at the employee or the employer's discretion. An example of a furlough would be the individual who is granted a leave of absence to serve in the military for a specified period. These individuals retain all the rights and privileges due an employee, but whether the furlough is a paid or unpaid leave is dependent upon the company's policy.

    According to information from the U.S. Bureau of Labor Statistics, full-time and union employees generally are offered more lucrative paid leave benefits than part-time or non-union workers. Larger companies typically offer better paid leave benefits than smaller companies.

    Paid holidays are a way to reward employees for their service. As you pursue the articles below, you'll find information on important legal issues regarding the various types of paid leave. We've also included some sample policies for your use:

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    Wellness Programs

    Yoga or aerobics classes can be a part of a wellness program. Properly planned, implemented and utilized wellness programs can be a win for everyone. The employer benefits from having less absenteeism and higher productivity and employee morale. The employees enjoy better mental attitudes and physical health and may even lose weight or gain strength from participating in exercise or fitness programs.

    Some examples of wellness programs are:

    • Exercise programs or fitness club access
    • Weight management education and programs
    • Stress management or smoking cessation education
    • Diet, nutrition or fitness education or programs.

    More employers are opting to include some version of a wellness program in their benefit packages because of the spiraling cost of both health care and health insurance. Because individuals are living and working longer, staying healthy and avoiding health risks is becoming a greater priority for many. Use the information below to help you make more informed decisions about what type of wellness programs might best suit your company:

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    Tangible and Intangible Rewards

    Ribbons, trophies and recognition are effective employee incentives. Many employers feel that they must offer employees monetary rewards to motivate them to sell or produce more. In reality, many individuals work just as hard (and sometimes harder) to obtain non-monetary rewards such as preferred parking privileges, a larger office, a prestigious title or a handsome engraved plaque or trophy. If you want to inject new life and enthusiasm into your employee incentive plans, try some or all of these:

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    Employee Retention

    How many more employees can you retain with your benefits plan? What does it cost an employer when he or she loses a skilled worker? "According to John Dooney, manager of strategic research at the Society for Human Resource Management, if no other employee leaves due to the departure of the original departing employee, the cost of losing an employee is about 38 percent of the departing employee's annual wage." 2

    The loss of a veteran employee leaves an opening that must be filled in most cases (the exception being loss by attrition). To fill the vacancy, the employer must advertise the position, screen applicants, interview, hire and train the new employee.

    Production may be slowed down or lost, and the time and money investment can be substantial. In most cases, it is always preferable to retain employees (if possible) rather than replace them.

    Here are some innovative ideas and tips you may not have consider to increase your employee's satisfaction and keep them on the payroll:

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    Benefit Planning and Legalities

    Check with an attorney to ensure compliance. As you prepare and implement employee compensation and benefit programs, you'll want to make sure that you have considered all the legalities and complied with all pertinent state, local or federal mandates. Use the information provided here as a guide, but always check out the specific rules and regulations for the locality in which your business is located. Consult an attorney or other qualified professional to ensure all plans are in compliance.

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    Employer Benefits

    Employers benefit as much from compensation and benefits programs as employees do. We've talked a lot about the benefits to employees of compensation and benefit programs, but what about the advantages for the employer? In addition to saving money over the long-term because of increased employee retention and satisfaction, typically the employer sees an increase in his or her company profits. Here's an in-depth look at the pros of such programs:

    The bottom line is that employee benefit and compensation plans are part of an overall strategy for the growth and well-being of companies. Whether you have two individuals on staff or thousands of employees, it's important to have the best plan in place to yield the best results for everyone.

References

  • All images are from SXC and used under royalty free license
  • Image: http://www.sxc.hu/photo/980837 by duchessa
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  • 1 - Undisclosed, "Employer Costs for Employee Compensation," Bureau of Labor Statistics,
  • Image: http://www.sxc.hu/photo/1294754
  • 2 - Morey, Penny, Ask Entrepreneur, Entrepreneur
  • Image: http://www.sxc.hu/photo/103981
  • Image: http://www.sxc.hu/photo/1345231
  • Image: http://www.sxc.hu/photo/1237611 by svilen001, www.effective.com
  • Image: http://www.sxc.hu/photo/1138686
  • Image: http://www.sxc.hu/photo/1228991
  • Image: http://www.sxc.hu/photo/983479
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  • Image: http://www.sxc.hu/photo/984784 by duchessa