Introduction
The compensation of employees in an organization is influenced by many external issues, such as laws and demand and supply factors, and internal ones, such as the culture of the organization. This role usually falls to the HR department unless otherwise stated so or in matters concerning executive compensation, in which case a special committee is set. When developing compensation package for employees, all regulations federal and state should be followed, and it is the role of the HR department to ensure this. The Fair Labor Standards Act 1938 (FLSA) is one of the most conclusive documents that address various issues concerning employee compensation. The success of an organization is dependent on its adherence to legal policies for both executives and employees and the effectiveness of the compensation policies adopted.
Briefing on Legal Issues that Influence Compensation
Many legal institutions, including federal and state laws, influence and regulate the compensation of employees in the US. The US department of labor helps enforce employee compensation rules, especially those concerned with parenting. Others include the Department of Labor, Social Security Administration, Equal Opportunity Employment Commission, and the FLSA. Of all these, the FLSA is the most conclusive and comprehensive. Employees paid on commission, those who work on farms, IT experts earning $ 27.60 per hour or more, farmworkers, outside employees paid on salary bases, and executives are not covered by the FLSA act. The minimum wage for the exempt employees as of the 2016 FLSA amendment was $35,568 (Bradley, 2019). The rest of the employees are covered and protected by the Act, which prevents manipulation of the employee by the employer.
There are two types of employee compensation; salaries and wages. The legal regulations influencing these two types of payments are different as the two differ in various aspects. Wages are calculated by the hour but tend to be paid weekly, while salaries are disbursed only in specific durations, mostly monthly but sometimes weekly. FLSA covers the wages; hence the name (non-exempt) but its scope and laws don’t cover salaries; thus, salaried employees are legally referred to as (exempt). The FLSA addresses various issues, including minimum wage, keeping records, youth employment, and how overtime compensation is handled. The Act states that the federal minimum wage is $7.25, but states can set a minimum wage above this. The proposed raise of wage act seeks to raise the minimum wage to $24 by 2024 (Wilson, 2019). In the case of overtime, according to FLSA, an employee is supposed to be paid 1.5 times above their usual pay unless the employee is exempt from minimum compensation.
FLSA also lists job specifications that minors under 14 years of age are prohibited from doing, stating that they are too “dangerous.” These jobs include operating power-driven machinery, performing bank operations, doing door-to-door sales and marketing, and doing dangerous works involving ladders. The FLSA also requires employers to maintain sufficient and accurate documents of the hours worked, wages paid, and other ordinary wage records that help the good running of their organization. The details of all the employees that the organization has recruited should be maintained and include the employee’s name, age, gender, and address. According to the Act, any deduction or addition of wages should adequately be recorded; otherwise, the organization may face punishments. The FLSA act also states that Particular records are required for employees who work remotely and receive lodging from the employer. All these regulations seek to eliminate conditions detrimental to the maintenance of the minimum standard of living necessary for health, efficiency and general well-being of workers (England &Alcorn, 2018). The document is one of the most conclusive legislations when it comes to matters involving employee compensation.
Challenges in Setting Executive Compensation Levels
Setting executive compensation levels is a complex process that is often faced with controversial arguments. Politicians, regulators, investors, and executives have all taken strong positions on whether and how to reform (Edmans et al., 2017). The first issue that arises is who should set up the compensation plan and their goals and motives. Unlike the HR department’s low-level employee plan, the plan to determine executives’ compensation requires a special committee. The process also requires collecting and analyzing huge but crucial data to assess the criteria for salary and bonuses that will not hurt an organization. The organization’s long-term and short-term goals have to be evaluated by the committee or the body chosen to set the levels. Various stakeholders, including the shareholders, have to approve the compensation plans making the process long. Again, both federal and state legal regulations have to be considered and adhered to avoid penalties. The internal structures such as the organization’s culture, mission, and vision included in the organization’s internal laws have to be followed. All these regulations make the determination of executive employee levels complex and challenging.
It has long been argued that executives such as CEOs and CFOs are overly compensated because they are in control and determine various compensation standards. However, Hitt & Haynes (2018) show that while most CEO are overcompensated a substantial number is also underpaid. Most corporate executives state that their compensations are fair based on the job description, job analysis, job evaluation, and payment structures to determine their income. However, some of the incentives set to encourage the executive employees to maximize their work make them take excessive risks that may, in the long run, lead to the demise of organizations, as was seen in the 2008 financial crisis. When setting executive compensation packages, the HR departments are often faced with the challenge of if they should include benefits and bonuses. The dilemma is whether to add executive incentives, which may encourage risky decision-making, or cut the benefits and only have them get the base pay, a decision that may bring complacency.
Analysis of Pay for Performance Compensation Method
Pay for performance programs increase the productivity of employees by boosting their motivation. Incentives are often associated with little financial rewards, such as bonuses or executive stock options (Holmström, 2017). When the pay for performance strategies is aligned with the organization’s objectives and values, they produce a motivated workforce that keeps the organization’s values. This compensation strategy also retains the top talent for the organization and attracts performance-oriented individuals. Pay for performance scheme motivates and boosts the morale of all employees as in the end one packets what they have worked hard to achieve. It also produces responsible employees who know that the organization’s success and their success are aligned.
The pay for performance compensation strategy comes with its reasonable share of blemish. First, it demotivates the low-performing employees, especially those in their learning phase, inhibiting growth. The focus on money in organizations that base their pay for performance on output may lead to less quality output with many defects. If the compensation schedules and bonuses on performance are not well calculated, this motivation scheme may reduce an organization’s profits. Incentives also discourage teamwork as employees view the time used to help other employees as a waste of time. Bartel, Cardiff-Hicks, and Shaw (2017) study in law firms showed that partners were less willing to share their work with associates in cases where compensation was done based on individual billing. Conflicts may even arise when one employee considers the other to be wasting their valuable earning time. Finally, pay on performance may lead to overwork of employees, resulting in burnout, which may reduce the organization’s performance in the long term.
Incentive policies are most useful and successful when used in a few industries where they fit and in a correct manner that does not lead to reverse results. Incentive systems that are appropriately designed have to consider all activities an agent can engage in (Holmström, 2017). Incentive pay is most useful when used in the field where managers can quantitatively measure performance in units or other concrete terms. It is also more applicable in areas where information flows easily from one party to another and does not discourage teamwork. Some incentives are better given through recognition rather than quantity as thing brings more collaborative work focused on quality. The management can also provide incentives to the whole team as shared profits to promote teamwork. To prevent employee burnout, the responsible parties should consider giving incentives for additional time off.
Conclusion
The Hr department should work closely with top management to ensure the success of an organization by setting effective compensation schemes and levels for all employees, the executives included. The executives pose a more significant challenge in providing effective compensation packages because of their control; nonetheless, setting up a special committee would help. The minimum wage, maximum hours, overtime compensation, and proper documentation of legal regulations should be recommended to the CEO to avoid litigations. The organization should look at the field it specializes in and decide if incentive pay is beneficial or non-beneficial. When deciding to adopt the incentive or not, a SWOT analysis management technique to help in choosing the best alternative should be used.
References
Bartel, A. P., Cardiff-Hicks, B., & Shaw, K. (2017). Incentives for lawyers: Moving away from “Eat What You Kill”. ILR Review, 70(2), 336-358. Web.
Bradley, D. H. (2019). Overtime Exemptions in the Fair Labor Standards Act for white-collar employees: Frequently asked questions. Ecommons.cornell.edu. Web.
Edmans, A., Gabaix, X., & Jenter, D. (2017). Executive compensation: A survey of theory and evidence. The handbook of the economics of corporate governance, 1, 383-539.
England, K., & Alcorn, C. (2018). Growing care gaps, shrinking state? Home care workers and the Fair Labor Standards Act. Cambridge Journal of Regions, Economy and Society, 11(3), 443–457.
Hitt, M., & Haynes, K. T. (2018). CEO overpayment and underpayment: Executives, governance and institutions. Management Research: Journal of the Iberoamerican Academy of Management, 16(1), 38–46.
Holmström, B. (2017). Pay For Performance and Beyond. American Economic Review, 107(7), 1753–1777. Web.
Wilson, V. (2019). The Raise the Wage Act of 2019 would give black workers a much-needed boost in pay. Web.