PROCEDURES FOR GRADING JOBS AND FIXING RATES OF PAY

Job Grading

The procedures for grading new jobs or regrading existing ones should lay down that grading or regrading can only take place after a proper job evaluation study conducted by a member of the personnel department or a job evaluation panel advised and assisted by a specialist. An appeal system should be built into the procedure.

The steps which can be taken to control grade drift are discussed later in this chapter.

Fixing Rates of Pay on Appointment

Managers should have a major say in pay offers and some freedom to negotiate when necessary but they have to take account of relevant pay policies, and the amounts should normally be confirmed by a member of the personnel function and/or a higher authority.

Policy guidelines should set out the circumstances in which pay offers above the minimum of the range can be made. It is customary to allow a reasonable degree of freedom to make offers up to a certain point, eg the 90 per cent level in an 80–120 per cent pay range. Most pay systems allow offers to be made up to the reference point depending on the extent to which the recruit has the necessary experience, skills and competences. Offers above the reference point should be exceptional because this would leave relatively little room for expansion. They are sometimes made because of market pressures, but they need to be very carefully considered because of the inevitability of grade drift unless the individual is promoted fairly soon.

Promotion Increases

Promotion increases should be meaningful, say a minimum of 5 per cent but often 10 per cent or more. They should not normally take the promoted employee above the reference point in the pay range for his or her new job so that there is adequate scope for performance-related increases. One good reason for having reasonably wide differentials is to provide space for promotions.

PAY MANAGEMENT PROCESSES IN UK COMPANIES

In broad terms, the UK 'unitary' board typically manages its own pay along the following lines:

§  Responsibility for the pay of the executive directors is delegated to the remuneration committee (to be formed of at least three independent, non-executive directors), which will make its annual recommendations to the board.

§  The pay of the non-executive directors is usually managed by the chairman, perhaps in conjunction with the chief executive, who will also make recommendations to the board (often less frequently than annually).

§  The board as a whole votes on these pay recommendations but no director is able to vote on his or her own pay.

§  Shareholders have the opportunity annually to vote on the acceptability of the remuneration committee's report on boardroom pay in the company's report and accounts and to vote to approve (or otherwise) any new long-term incentive schemes for the board or that involve the issue of new shares or the transfer of treasury shares.

The impact of the annual vote of the remuneration committee's report is purely advisory but most boards seek to achieve high levels of shareholder approval - the disapproval of a small but significant minority of shareholders can be very damaging to the company's reputation and, if not addressed, can jeopardize the remuneration committee chairman's position.

Executive Directors' Pay

The principles (outlined in the Greenbury Report) that should underpin the recommendations of remuneration committees concerning executive directors' pay are that:

§  basic salaries should be maintained at a level that allows the company to compete effectively for good-calibre executives;

§  annual pay increases (if any) should be awarded in relation to performance and an assessment of market competitiveness from one or more reputable sources;

§  the basis, targets and payments from executive incentive schemes should serve the needs of the business and be satisfactory to shareholders in both the short and the longer term;

§  the balance between the elements of pay and benefits should be maintained on a sensible, competitive and defensible basis;

§  relationships between boardroom pay and that of employees at a more junior level should remain consistent and sensible;

§  in addition, directors contracts should be reviewed from time to time to ensure they remain up to date and defensible (eg notice periods should be 12 months or less).

In applying these principles the remuneration committee should seek proper, professional and, where appropriate, independent external advice.

The 2003 Higgs Review suggested that boards should adopt a process whereby the performance of individual directors, as well as the board as a whole, should be assessed each year. The results of this process clearly should be used to support the work of the remuneration committee.

Non-executive Directors' Pay

The pay for non-executive directors (again from Greenbury) should:

§  provide a reasonable recompense for the time and commitment a non-executive director contributes to board meetings (ie reflecting the role undertaken, time commitment required, committee and other responsibilities taken on, the company's size and the individual's unique skills/reputation);

§  not be so large or so structured (eg by participating in any incentive scheme or having a company car) as to jeopardize the non-executive director's independence.

In response to the second condition, many companies pay non-executive directors purely in cash but now some allow or even require their non-executive directors to take some or all of their fees in the form of the company's shares.

In the introduction to his 2003 review, Sir Derek Higgs observed that, 'Too often the governance discussion has been shrill and narrowly focused on executive pay with insufficient attention to the real drivers of corporate success. It would represent progress if this Review were to open a richer seam of discussion, one with board performance and effectiveness at the core.' Although the spotlight seems very unlikely to move away from directors' pay, it does seem that the press and boards themselves increasingly recognize the need for a clear link between pay and performance at board level and that 'payments for failure' (large pay-offs to directors leaving as a result of poor performance) will be much more difficult to make in the future.

CORPORATE GOVERNANCE AND BOARDROOM PAY IN THE UK

Reward management in the UK boardroom is complicated by the way that UK companies are run and has to be set against the backdrop of the many reviews of directors' pay and related corporate governance issues that have taken place here in the past decade or so.

Corporate Governance

In simple terms, a UK company is owned by its shareholders, but the power and responsibility for almost all decisions concerning its business operations are devolved to its board of directors, including most decisions about pay. Public company shareholders in particular are usually far removed from any day-to-day or even strategic decision making. In the UK (as in the USA) the board of directors is a single or 'unitary' structure, responsible for corporate governance as well as business decision making. While some other countries use two-tier board structures that separate the two, the 'unitary' board structure relies on an internal division of responsibility, typically between non-executive (corporate governance) and executive (business decision making) directors.

UK Reviews of Corporate Governance and Directors' Pay

A number of reviews have taken place in the UK into corporate governance processes and directors' pay. They were each undertaken in response to a different set of factors but all included recognition (implicit or explicit) of the potential for conflicts of interest arising as a result of the 'unitary' board structure. The sequence started with the Cadbury Report, was furthered by Greenbury and tied together by Hampel. Subsequently, Turnbull and then Higgs examined how boards work together, including a review of the structures and processes by which directors' rewards are set. The stated objectives of these reviews were various but at their hearts was often the concern of the government of the day that directors' pay might, at best, be out of control and, at worst, include aspects that might be encouraging behaviour contrary to shareholders' interests. 

EXTRA PAYMENTS TO EMPLOYEES | Nonretirement Benefits

Educational Assistance

For several years the Internal Revenue Code has provided favorable tax treatment to employees who receive benefits from their employers for educational assistance. Section 127 of the Code, which allows employees to receive annually the first $5,250 of these benefits on a tax-free basis, is scheduled to expire for courses beginning after December 31, 2001. (However, the date has been extended several times before and will probably be extended again, or the Code section may be made permanent.) For benefits to be tax free, the employer's plan cannot discriminate with respect to eligibility in favor of officers, shareholders, highly compensated employees, or their dependents. In addition, no more than 5 percent of the benefits may be paid out to shareholders or owners (or their dependents) who are more-than-5-percent owners of the firm.

Eligible benefits include tuition, fees, and books. The costs of supplies and equipment are also included as long as they are not retained after completion of the course. Meals, lodging, and transportation associated with educational expenses cannot be received tax free, nor can tax-free educational assistance be provided for graduate-level courses. For purposes of Sec. 127, a graduate-level course is defined as any course taken by an employee who has a bachelor's degree or is receiving credit toward a more advanced degree, if the particular course can be taken for credit by any individual in a program leading to a law, business, medical, or other advanced academic or professional degree. Courses involving sports, games, or hobbies are also ineligible for favorable tax treatment. Although an employer's plan can pay for any of these types of courses, an employee will be taxed on the value of the employer's contribution to their cost.

Many employers provide reimbursement for certain educational expenses that do not qualify for favorable tax treatment under Section 127. While such reimbursements result in taxable compensation for an employee, the employee may be eligible for a federal income tax deduction (subject to the 2-percent-of-adjusted-gross-income floor on miscellaneous itemized deductions) if he or she itemizes deductions. The deduction is allowed for educational expenses that are incurred (1) to maintain or improve a skill required in employment or (2) to meet the express requirements of the employer as a condition for retaining employment. Other types of educational expenses, such as costs incurred to qualify the employee for a new trade or business, are not deductible.

Moving-Expense Reimbursement

To attract new employees and to encourage current employees to move to suit the employer's needs, many businesses provide reimbursement for moving expenses. Such reimbursement is includable in an employee's income, but the employee is allowed certain offsetting income tax deductions if specified rules are satisfied. To receive the deductions, the employee must have moved because of a change in job location. In addition, the employee must satisfy both a distance test and a time test. The distance test requires that the employee's new workplace be at least 50 miles farther from the employee's old residence than the employee's old workplace (or at least 50 miles from the employee's old residence if the employee was previously unemployed). The time test requires that the employee work full-time in the general location of the new residence for at least 39 weeks during the 12 months following the move. An employee may take the applicable deductions in anticipation of satisfying the time test, but additional taxes will be payable if the time test is not ultimately met.

If all the preceding rules are satisfied, an employee may deduct the following expenses:

• Transportation expenses in moving household goods and personal effects

• Travel and lodging (but not meal) expenses in moving to the new residence

An employer may pay for other expenses, such as expenses to sell an old residence, premove travel to look for a new residence, or temporary living costs at the new location. Because these reimbursements will be taxable income without a corresponding deduction, the employer may give the employee a bonus to offset the increased tax.

Suggestion Awards

Some employers, particularly those in manufacturing industries, give awards to employees who make suggestions that will improve the operating efficiency of the firm if implemented. The awards are often a percentage of the firm's estimated savings over some specified future period of time but may be subject to a maximum dollar amount. If a suggestion plan is properly administered, the benefits of the plan may far exceed its costs while at the same time increasing the motivation and involvement of employees.

Suggestion awards are included in an employee's gross income for tax purposes.

Service Awards

Many employers provide awards to employees for length of service. These awards are often nominal for short periods of service (five or ten years) and may consist of such items as key chains, flowers, or pens. Awards typically increase in value for longer periods of service, and employees may actually be given some choice in the award received.

If the value of a service award is de minimis, it is not included in an employee's income. To be de minimis the value of the benefit must be so minimal that accounting for the cost of the benefit would be unreasonable or administratively impractical. Service awards of higher value may also be excludable from an employee's income if they are considered qualified plan awards. However, the total amount excludable from an employee's income for qualified plan awards (which also include awards for safety) cannot exceed $1,600 per year. Qualified plan awards must be provided under a permanent written program that does not discriminate in favor of officers, shareholders, or highly compensated employees. In addition, the average annual cost of all awards under the plan cannot exceed $400.

Productivity and Safety Achievement Awards

Some employers provide awards for productivity and safety achievement. Productivity awards are fully treated as compensation. However, while awards for safety achievement given to professional, administrative, managerial, or clerical employees are fully taxable, such awards are treated as qualified plan awards for other employees and are included in the $1,600 excludable figure mentioned previously under service awards.

Holiday Bonuses and Gifts

Many employers give gifts or bonuses to employees, particularly at Christmastime. Because the value of such gifts is typically small, some employees tend to resent gifts of money. Therefore, gifts such as liquor or a ham are often given.

As with service awards, a holiday gift does not result in taxation for an employee as long as the market value of the gift is small.

PAYMENTS FOR TIME NOT WORKED | Nonretirement Benefits

Holidays
Employers normally pay employees for certain holidays. At a minimum, employees usually receive pay for the following:

• New Year's Day
• Memorial Day
• The Fourth of July
• Labor Day
• Thanksgiving
• Christmas

Most employees receive at least six and sometimes as many as 11 or 12 additional holidays, which may include the following:

• Martin Luther King's Birthday
• Washington's Birthday
• Lincoln's Birthday
• Presidents' Day
• Good Friday
• Columbus Day
• The Friday after Thanksgiving
• Veterans Day
• Christmas Eve
• New Year's Eve
• The employee's birthday
• Various state holidays

For some institutions, such as banks, holidays are prescribed by law. However, for most companies, management decides which holidays to provide, subject to collective bargaining if applicable.

When a scheduled holiday falls on a Saturday, employees who normally do not work on that day are given the preceding Friday off. When a holiday falls on Sunday, it is normally observed on Monday. Restaurants and retail establishments are increasingly open for business on holidays. When this occurs, employees who work are usually paid at least time and a half and sometimes as much as triple time.

Some companies, realizing that not all employees want to take the same holidays, try to satisfy these needs by adopting holiday plans that include a minimum number of scheduled holidays coupled with a specific number of "floating holidays" to be taken at an employee's discretion. Usually, there is no requirement that the days taken actually be holidays, so in effect they become additional vacation days in lieu of holidays.

Like vacation pay, holiday pay is taxed as regular income.

Personal Time Off with Pay
Because personal situations that require an employee to be away from work occasionally arise, many employers allow employees to take time off with pay for certain reasons, the more common of which are the following:

• Reserve/National Guard duty. Laws sometimes require that employees be given time off for reserve or National Guard duty, but there is no stipulation that pay continue during this period. However, the majority of employers compensate their employees for the difference between their regular pay and any compensation received for the reserve or National Guard duty.

• Jury duty. Most employers grant (and may be required to grant) time off for jury duty. Because employees are usually compensated for jury duty, some employers pay only the difference between this amount and an employee's regular pay. However, the amount paid for jury duty is small and often just barely covers an employee's extra expenses. Therefore, many employers continue regular compensation with no deduction.

• A death in the family. Employers often allow up to five days off with pay for the death of family members. At a minimum, this usually includes the death of a parent, child, spouse, or other relative residing in the house-hold. Some employers allow a shorter period of time, such as a day or half a day, to attend funerals of other relatives and sometimes even persons other than relatives.

• Sabbatical leaves. Sabbatical leaves are well established as employee benefits at educational institutions. Typically, faculty members are permitted an extended leave of a semester or a year after a specified period of service, such as seven years. During the sabbatical leave, the faculty member receives full or partial pay while performing no services for the employer. Meanwhile, the faculty member is often required to complete a research project or some similar activity as a condition of the sabbatical. Noneducational employers, particularly those having employees with professional degrees, sometimes provide similar benefits to professional employees to give them an opportunity to engage in research or study that is not directly job related.

Some less common reasons for which employers may allow time off with pay include the employee's getting married and serving as a witness in a court proceeding. Because still other personal reasons for needing time off may arise, employers may grant two or three days of personal leave that can be taken at an employee's discretion.

Personal Time Off Without Pay (Family Leave)
For many years, most industrialized countries have had legislation that enables employees to be away from work for extended periods without jeopardizing their jobs. The reasons for such leave vary among countries, as does the extent to which the employer must continue to provide pay and benefits to an employee on leave.

Over the last two decades, an increasing number of American employers have voluntarily begun to allow employees to take time off without pay. Reasons for such leave may include active military duty, extended vacations, honeymoons, education, the birth or adoption of a child, and the illness of a family member. Usually, such time off has been subject to the approval of the employer. Family leave is becoming more and more common as many states and the federal government adopt family-leave legislation.

State Laws
In recent years, the legislatures of almost every state have considered family-leave legislation, and more than half the states have enacted such legislation. As a general rule, these laws allow an employee to take an unpaid leave of absence for reasons such as the birth or adoption of a child and the illness of a family member. The length of leave allowed varies considerably among states, but it usually ranges from three to six months. When the family leave is completed, the employer is required to allow the employee to return to the same or a comparable job.

Almost all family-leave laws apply to public employers, and about half of the laws apply to private employers with more than a minimum number of employees, usually in the range of 25 to 100. In all states, employers are allowed to limit family leave to employees who have met certain eligibility requirements. While these requirements vary, the most common requirement is at least one year of full-time employment. At a minimum, most family-leave laws allow an employee to continue medical expense coverage at his or her own cost. Some laws require all employee benefits to be made available.

Federal Law
In 1993, the first federal family-leave legislation—the Family and Medical Leave Act—became effective. Unlike some federal legislation, it applies not only to private employers but also to nonprofit organizations and government entities, including Congress. The provisions of this legislation cover only a small percentage of the nation's employers but approximately two-thirds of all employees.

Despite concerns by employers that the act would increase costs and lower productivity, the actual effect seems to have been minimal, partly because many large employers already had leave policies similar to the act's provisions. A report issued in May 1996 by the Bipartisan Commission on Family and Medical Leave reported the following:

• Approximately 90 percent of employers reported that there was no noticeable effect on productivity, profitability, and growth as a result of the act.

• Only about 16 percent of the persons eligible for leave actually took it. The vast majority of persons who did not take leave for which they were eligible said they could not afford the resulting wage loss.

• The median length of leave time is 10 days.

• The group most likely to take leave is employees between the ages of 25 and 34.

The act applies only to employers with more than 50 employees within a 75-mile radius. To comply with the 50-employee requirement, an employer needs only to have that many employees during each workday for a period of 20 or more calendar weeks during the current or preceding calendar year. Part-time employees and employees on unpaid leaves of absence are included in the calculation. The 50-employee requirement is based on "joint employment," which means that two or more related companies can be treated as a single employer on the basis of factors such as common management, interrelations between operations, centralized control of labor relations, and the degree of common ownership or management. The 75-mile radius is based on the shortest route on public roads or public transportation.

With some exceptions, a worker must be allowed to take up to 12 weeks of unpaid leave in any 12-month period for the birth or adoption of a child; to care for a child, spouse, or parent with a serious health condition; or for the worker's own serious health condition that makes it impossible to perform a job. An employer may use any one of the following four methods to determine the 12-month period to which the family leave applies:

• The calendar year

• Any fixed 12-month period

• The 12-month period beginning with any employee's first day of leave

• A rolling 12-month period measured backward from the date leave is used

With one exception, the method chosen must apply uniformly to all employees. The exception occurs if a multistate employer operates in one or more states that have family-leave legislation that mandates a method different from the one chosen. In that case, the employer is permitted to comply with the state's requirement for employees located in that state but must use the chosen method for employees in other states.

A serious health condition is defined as one that requires continuing treatment from a health care provider. The regulations implementing the act generally define this as meaning that the condition will require absence from work, school, or regular daily activities for more than three calendar days. However, the regulations also include treatment for pregnancy and certain chronic conditions, such as diabetes and asthma, as being serious health conditions even though treatment at any time may last less than three days. In addition, the definition includes health problems that are not ordinarily incapacitating on a day-to-day basis, but for which a person must undergo a series of multiple treatments. Examples in the regulations include chemotherapy or radiation for cancer, kidney dialysis, and physical therapy for severe arthritis. The regulations specifically exclude the following from the definition of a serious health condition: common colds, flu, upset stomach, and routine dental problems. Stress is also excluded, but mental illness arising from stress can qualify.

The act applies to both full-time and part-time employees. The latter must be allowed to take leave on a basis that is proportional to that given to full-time employees. However, leave can be denied to anyone who has not worked for the employer for at least one year and worked at least 1,250 hours during that period.

In most cases, the rules allow employees to take leave intermittently or by working a reduced week, but only with the employer's approval. The exception is that leave because of a person's or family member's serious health condition may be taken whenever medically necessary.

An employer is allowed to substitute an employee's accrued paid leave for any part of the 12-week period of family leave. In addition, an employer can deny leave to a salaried employee within the highest-paid 10 percent of its work force if the leave would create a substantial and grievous injury to the organization's operations.

An employee is required to provide 30 days' notice for foreseeable leaves for birth, adoption, or planned medical treatment. The employer can require that an employee provide a doctor's certification of a serious illness. An employer can also require a second opinion but must pay for the cost.

During the period of leave, an employer has no obligation to continue an employee's pay or most benefits, and the employee is ineligible for unemployment compensation. However, an employer must continue to provide medical and dental benefits during the leave as if the worker were still employed. The employee must continue to pay any required plan contributions and must be given a 30-day grace period for such payments. The employer is also required to send the employee a notice no later than 15 days before the grace period expires, stating that coverage will be terminated if the premium is not paid. The employer is allowed to recover the cost of premiums paid by the employer during the leave if the employee does not return to work for reasons other than (1) the continuance, recurrence, or onset of a health condition (as previously defined) affecting the employee or the employee's spouse, parent, or child, or (2) other cirucumstances beyond the employee's control.

Upon return from leave, an employee must be given his or her old job or an equivalent job. The employee must also be allowed to regain any benefits that were enjoyed prior to the leave without meeting any requalification requirements. With respect to retirement plans, any period of leave must be treated as continued service for purposes of vesting and eligibility to participate.

Employers must comply with the new federal law as well as with any applicable state laws. Because most existing state laws have at least one provision that is broader than the federal legislation, an employer must have a complete understanding of both laws.

An employer should have a clear, written family-leave policy that is consistently enforced. In establishing this policy, the employer should address such issues as

• Eligibility requirements

• Employee certification of need for leave

• Employee rights upon returning from leave

• Employer rights if employee terminates at end of leave

The federal law requires that an employer post a notice explaining the Family and Medical Leave Act, a sample of which is contained in material from the Labor Department, which administers the law. In addition, if an employer does not provide employees with guidance about their rights and obligations under the act in employee manuals or handouts, this information must be provided to an employee at the time he or she requests it.

Supplemental Unemployment Benefit Plans
Collective-bargaining agreements may require that employers contribute to a supplemental unemployment benefit (SUB) plan that is designed to supplement state unemployment insurance benefits for workers who are unemployed. These plans rarely exist for nonunion employees. Benefits are often payable for at least a year and with regular unemployment benefits may be as high as 95 percent of what the worker was earning while employed.

SUB plans typically require that employers contribute to a SUB fund on the basis of the compensation of currently active employees, and employee contributions may also be required. The fund is usually maintained by trustees selected by the collective-bargaining agent, and it is frequently a common fund maintained for several employers. Employer contributions to the fund are income tax deductible, and if the fund is properly designed, earnings on fund assets may also be exempt from income taxation. Benefit payments to employees are fully taxable.