1-1McGraw-Hill/Irwin ©2008 The McGraw-Hill Companies, All Rights Reserved

Human Resource ManagementGaining a Competitive Advantage

Chapter 13

Employee Benefits

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Learning Objectives

After reading this chapter, you should be able to:• Discuss the growth in benefits costs and the underlying

reasons for that growth.• Explain the major provisions of employee benefits

programs.• Discuss how employee benefits in the United States

compare with those in other countries.• Describe the effects of benefits management on cost and

work-force quality.• Explain the importance of effectively communicating the

nature and value of benefits to employees.• Describe the regulatory constraints that affect the way

employee benefits are designed and administered.

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Introduction

• The average cost of benefits adds up to about 37 percent for every payroll dollar

– benefits compose about 27 percent of the total compensation package.

• Benefits are unique because:– there is more regulation of benefits than of

direct pay.– benefits have become almost obligatory for

employers to provide. – benefits are complex for employees to

understand.

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Reasons for Benefits Growth

• Laws mandating benefits passed during and after the Great Depression

• Wage and price controls instituted during WWII and labor shortages

• The tax treatment of benefits programs– The marginal tax rate is the percentage of an

additional dollar of earnings that goes to taxes

• Large group v. individual insurance• Organized labor• Employer differentiation

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Benefit Programs

Social Insurance

Private GroupInsurance

Family-FriendlyPolicies

RetirementPay For Time NotWorked

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Social Security

• Social Security includes provision for old-age insurance, unemployment insurance, survivors' insurance, disability insurance, hospital insurance, and supplementary medical insurance.

• Social Security retirement benefits are free from federal tax and free from state tax in some states.

• Currently, full benefits begin at age 65 or a reduced benefit can begin at age 62.

• Both employers and employees are assessed a payroll tax.

• The eligibility age for benefits and any tax penalty for earnings influence retirement decisions.

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Unemployment Insurance

• Unemployment insurance has the following objectives: – to offset lost income during involuntary unemployment,

– to help unemployed workers find new jobs,

– to provide an incentive for employers to stabilize employment,

– to preserve investments in worker skills by providing workers with income during short-term layoffs.

• Unemployed workers are eligible for benefits if they– have a prior attachment to the workforce,

– are available for work,

– are actively seeking work,

– were not discharged for cause, did not quit voluntarily, and are not out of work because of a labor dispute.

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Workers’ Compensation

• Workers' compensation laws cover job-related injuries and death.

• The system is based on no-fault liability.• Approximately 90 percent of U.S. workers

are covered.

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Private Group Insurance

• Offered at the discretion of employers, and plans are not legally required.

• Group rates are lower because of economies of scale, the ability to pool risks, and the greater bargaining power of a group.

• Medical insurance tends to be the most important benefit for people. – The Consolidated Omnibus Budget Reconciliation Act

(COBRA) requires employers to permit employees to extend their health insurance coverage at group rates for up to 36 months following a qualifying event, such as termination.

• Disability insurance includes short-term plans and long-term plans.

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Retirement

Defined Benefit Plan• Guarantees a specified

retirement benefit level to employees.

• Insulates employees from investment risk, which is borne by the company.

• PBGC guarantees basic retirement benefit in case of financial difficulties.

• ERISA increased the fiduciary responsibilities of pension plan trustees, established vesting rights and portability provisions, and established the PBGC.

Defined Contribution Plan

• Does not promise employees a specific benefit level upon retirement.

• Employers shift investment risk to the employee.

• There is no need to calculate payments based on age and service.

• Most prevalent in small companies.

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Types of Defined Contribution Plans

Money Purchase Plan

Profit-sharing PlanEmployee StockOwnership Plan

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Cash Balance Plans

• An employer sets up an individual account for each employee and contributes a percentage of the employee’s salary.

• The account earns interest at a predefined rate.

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Funding, Communication, and Vesting Requirements

• A summary plan description (SPD) obligates employers to describe the plan's funding, eligibility requirements, risks, and so on.

• ERISA guarantees that employees, after working a certain number of years, earn the right to a pension upon retirement. – These are referred to as vesting rights.

• Vesting schedules that may be used are as follows:– Employees are vested after five years of service.– Employers may vest employees over a three- to

seven-year period, with at least 20 percent in the third year and each year thereafter.

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International Comparisons

• Percentage of private sector labor force that is covered by a pension: –United States, 45 percent; –France, 100 percent; –Switzerland, 92 percent; –Germany, 42 percent–Japan, 39 percent.

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Pay for Time Not Worked

• In the European Community, as many as 30 days of mandated vacation is common.

• In the United States, there is no legal minimum, although 10 days is common.

• Sick leave programs often provide full salary replacement for a limited period of time, usually not exceeding 26 weeks.

• The amount of sick leave is often based on length of service, accumulating with service.

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Family-Friendly Policies

• To ease employees’ conflicts between work and nonwork, organizations may use family-friendly policies such as family leave policies and child care.

• The Family and Medical Leave Act:– applies to organizations with 50 or more employees

within a 75-mile radius– applies to childbirth or adoption; care for a seriously ill

child, spouse, or parent; or for an employee's own serious illness.

– Employees are guaranteed the same or comparable job when they return to work.

– Employees with less than a year of service or those who work less than 25 hours a week are not covered.

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Family-Friendly Policies

• Child Care - Employers may provide some type of child care support to employees: – supplies and helps employees

collect information about child care,

– vouchers or discounts for existing child care facilities, or

– child care facility at or near worksites.

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Managing Benefits: Employer Objectives and Strategies

• Surveys and Benchmarking– The company should know what the competition is

doing.– Surveys information is available from private

consultants, the Bureau of Labor Statistics (BLS), and the Chamber of Commerce.

• Cost control– The larger the cost of a benefit, the greater the

possibility for savings. – The rate of growth may result in serious costs in the

future. – Cost containment efforts can only work to the extent

that the employee has significant direction in choosing how much to spend in a benefit category.

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Healthcare: Controlling Costs and Improving Quality

• In the United States, health-care expenditures have gone from 5.3 percent of the GNP in 1960 to 14 percent recently.

• Attempts at cost control have come through employers, since most health care is provided through organizations.

• A recent trend has been to shift costs to employees through the use of deductibles, coinsurance, exclusions and limitations, and maximum benefits.

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Healthcare: Controlling Costs and Improving Quality

Health maintenance organizations (HMO)

• focus on preventive care and outpatient treatment.

• require employees to use only HMO services and providing benefits on a prepaid basis.

• physicians and health-care workers paid a flat salary to reduce incentive of raising costs.

Preferred provider organizations (PPOs)

• have contract with employers and insurance companies, to provide care at reduced fees.

• do not provide benefits on a prepaid basis.

• employees often are not required to use just the PPOs.

• tend to be less expensive than traditional health care but more expensive than HMOs.

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Employee Wellness Programs

• Focus on changing behaviors both on and off work time that could eventually lead to future health problems.

• There are two broad classes of EWP’s:– Passive

• use little or no outreach to individuals and provide no ongoing motivational support.

– Active• assume that behavior change requires not only

awareness and opportunity, but also support and reinforcement.

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Health Care Costs and Quality: Ongoing Challenges

• Two important phenomena are often encountered in cost control efforts– Piecemeal programs may not work well

because steps to control one aspect may lead to employees to “migrate” to other programs that provide medical treatment at no cost to them.

– There is often a so-called Pareto Group, which refers to a small percentage of employees being responsible for generating the majority of healthcare costs.

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Staffing Responsibilities that Control Benefits Cost Growth

• Because benefit costs are fixed, the benefits cost per hour can be reduced by having employees work more hours.

• Have employees classified as exempt, since they can then reduce their benefit costs per hour without having to pay overtime.

• Classify workers as independent contractors rather than employees, eliminating the employer's obligation to provide legally required benefits.

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Nature of the Workplace

• Assessing employee benefits preferences is essential.

• One approach is to use market research methods to assess employees’ preferences the same way consumers’ demand for products and services are assessed.

• Care must be taken not to raise employee expectations regarding future changes.

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Flexible Spending Accounts

• These plans permit employees to choose the types and amount of benefits that they want.

• Advantages include:– employees can be more aware and appreciative of

their benefits package– a better match between the package and the

employee's needs, which improves satisfaction and retention

– cost reductions are often achieved• Disadvantages include:

– high administrative cost– adverse selection

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Communicating with Employees

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Flexible Spending Accounts

• Permits pretax contributions to an employee account that can be drawn on to pay for uncovered health care expenses.

• Funds must be spent during the year or they revert to the employer.

• The major advantage is that take-home pay increases.

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General Regulatory Issues

• Benefit plans must meet nondiscrimination rules and qualified plans.

• Sex, age, and disability:– It is illegal for companies to require that women contribute

more to a pension plan than men.– Employers cannot discriminate against employees over the

age of 40 in terms of pay or benefits. – employees with disabilities have equal access to the same

health insurance coverage as other employees.

• Monitoring Future Benefits Obligations - The Financial Accounting Statement (FAS) 106 states that any benefits (excluding pensions) provided after retirement, cannot be funded on a pay-as-you-go basis. – They must be paid on an accrual basis.