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Chapter. 12. The Benefits Determination Process. What Are Employee Benefits?. - PowerPoint PPT Presentation
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McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.
12-1
The Benefits Determination
Process
Chapter
12
McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.
12-2
What Are Employee Benefits?
That part of the total compensation package, other than pay for time worked, provided to employees in whole or in part by employer payments, e.g. life insurance, pension, workers’ compensation, vacation, holidays . . .
McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.
12-3
Exhibit 12.1: Changes in Benefit Costs Over Time
1959 1969 1990 1998 2001
Percentage of Payroll (total) 24.7 31.1 38.4 37.2 39
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12-4
Benefit Costs
U.S. Chamber of Commerce reports benefit costs averaged 39% of payroll in 2001
Typical payroll dollar: 61.0 cents in wages 11.0 cents in medical benefits ($5,415/Ee) 10.9 cents in time not worked 8.2 cents in legally required payments 8.0 cents in retirement and savings contributions 1.0 cent in other costs
McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.
12-5
Benefit Costs
In 2001:Er size $/Ee on Benefits<100 13,064100-499 16,207500-999 19,9911,000-2,499 18,9102,500+ 18,308
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12-6
Health Care Costs and Firm Competitiveness
In 2004, health-care spending amounted to over $1,500 for every vehicle GM produced in U.S. (Chrysler, $1,400; Ford, $1,100)
American workers on average pay ~32% of their health costs, GM salaried ees ~27%, UAW members ~7%
Current ees and families account for 1/3 of total health bill, retirees the remainder
Competition prevents passing on cost to customers Japanese competitors have younger workforces with lower costs
As of 2003, Big Three had 524,000 hourly retirees, Toyota 49 (258 as of 2006)
Expense impacts bottom-line and investment in R&D See also “As Benefits for Veterans Climb, Military Spending Feels
Squeeze,” Wall Street Journal, 1/25/05 Adding prescription drug benefit to Medicare will save automakers
millions Companies lobbied for legislation that would cover all over 65, even
those with retiree health coverage thru Er GM spends $924 million annually on prescription drugs for retirees,
including those under age 65, Ford spends $300 million Source: Fortune, 9/29/03; Wall Street Journal, 4/7/05, 4/15/05; New York
Times, 5/19/06
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12-7
Wage and Wage and Price Price
ControlsControls
UnionsUnions
Employer Employer ImpetusImpetus
Government Government ImpetusImpetus
Cost Cost Effectiveness of Effectiveness of
BenefitsBenefits
Why the Growth in Employee Benefits?
McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.
12-8
Strategic Reasons for Offering Benefits
Help attract employees
Help retain employees
Elevate the image of the organization with employees and other organizations
Increase job satisfaction
McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.
12-9
Value of Employee Benefits
Employees . . .
Expect benefits as part of their total compensation
Do not understand true value of benefits
Often undervalue their benefits
Often take benefits for granted
Often cannot list all benefits received
Have preferences regarding types of benefits they want
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12-10
Exhibit 12.2: Ranking of Employee Benefits
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12-11
How much total compensation, including benefits, should be provided?
What is the relative role of benefits in a total compensation package?
What is expected from benefits? What is an appropriate mix of benefits?Which employees should be given/offered which
benefits?How do benefits aid in minimizing turnover or
maximizing recruitment and retention of employees?
What strategies can be used to ensureexternal competitiveness of benefits?
Can benefits be cost justified?
Key Issues: Benefit Planning and Design
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12-12
Four Major Administrative Issues
Key Issues: Benefit Administration
11Who should be protected or benefited?• Exhibit 12.3• Series of questions need to be addressed
Who should be protected or benefited?• Exhibit 12.3• Series of questions need to be addressed
22How much choice should employees have among an array of benefits?• Exhibit 12.4 & Exhibit 12.5• Issues associated with flexibility
How much choice should employees have among an array of benefits?• Exhibit 12.4 & Exhibit 12.5• Issues associated with flexibility
33How should benefits be financed?• Noncontributory• Contributory • Employee financed
How should benefits be financed?• Noncontributory• Contributory • Employee financed
44 Are benefits legally defensible?Are benefits legally defensible?
McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.
12-13Exhibit 12.3: Contingent Worker Benefits Compared to Full-Time
Workers
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12-14
Exhibit 12.4: Possible Optionsin a Flexible Benefit Package
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12-15
Exhibit 12.5: Advantages of Flexible Benefits
Employees choose packages that best satisfy their unique needs.
Flexible benefits help firms meet the changing needs of a changing workforce.
Increased involvement of employees and families improves understanding of benefits.
Flexible plans make introduction of new benefits less costly.
Cost containment: Organization sets dollar maximum; employee chooses within the constraint.
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12-16
Exhibit 12.5: Disadvantages of Flexible Benefits
Employees make bad choices and find themselves not covered for predictable emergencies.
Administrative burdens and expenses increase.
Adverse selection: Employees pick only benefits they will use; the subsequent high benefit utilization increases its cost.
Subject to non-discrimination requirements in Section 125 of the Internal Revenue Code.
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12-17
Financing Benefits Plans: Alternatives
Non-contributory
Employer pays total costs
Contributory
Costs shared between employer and employee
Employee financed
Employee pays total costs for some benefits
By law the organization must bear the cost for some benefits
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12-18
Benefits Package
Employer Factors1. Relationship to total compensation costs2. Costs relative to benefits3. Competitor offerings4. Role of benefits in:
AttractionRetentionMotivation
5. Legal Requirements
Employee Factors
1. Equity: fairness historically and in relationship to what others receive
2. Personal needs as linked to:AgeSexMarital statusNumber of dependents
Exhibit 12.6: Factors Influencing Choice of Benefit Package
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12-19
11 Communicating about the benefits programCommunicating about the benefits program
22 Claims processingClaims processing
33 Cost containmentCost containment
Three Administrative Issues
Administering the Benefits Program
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12-20
Trends Related to Cost Containment
Probationary periods
Benefit limitations
Copay
Administrative cost containment
Retaining strategic function internally
Significant movement to outsourcing
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