Human Resource Management:Gaining a Competitive Advantage

Chapter 13

Employee Benefits

Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Learning Objectives

Discuss growth and its reasons in benefits costs.

Explain provisions of employee benefits programs.

Compare U.S. and other countries’ employee benefits.

Describe effects of benefits management on cost and work-force quality.

Explain importance of effectively communicating nature and value of benefits to employees.

Describe regulatory constraints that affect the way employee benefits are designed and administered.

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Introduction

Average cost of benefits is about 37% for every payroll dollar. about 27% of total compensation package.

Benefits are unique because: more regulation of benefits than direct pay. almost obligatory for employers to provide. complex for employees to understand.

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Reasons for Benefits Growth

Laws mandating benefits passed during and after Great Depression

Wage and price controls instituted during WWII and labor shortages

Tax treatment of benefits programs Marginal tax rate is % of an additional dollar of

earnings that goes to taxesLarge groupV. individual insuranceOrganized laborEmployer 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 provides 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.

Full benefits begin at age 65 or a reduced benefit at 62. Both employers and employees are assessed payroll tax.

Eligibility age for benefits and tax penalty for earnings influence retirement decisions.

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Unemployment Insurance

4 Objectives of Unemployment Insurance:

1. offset lost income during involuntary unemployment

2. help unemployed workers find new jobs

3. provide an incentive for employers to stabilize employment

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

No state imposes the same tax on every employer. Unemployed workers are eligible for benefits if they

1. have a prior attachment to the workforce

2. are available for work

3. are actively seeking work

4. 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.

System is based on no-fault liability. Covers 90 %of U.S. workers. 4 Categories of Benefits:

1. disability income

2. medical care

3. death benefits

4. rehabilitative services.

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Private Group Insurance

Offered at employer’s discretion; plans not legally required.2 major types: medical insurance and disability insurance.

Medical insurance -most important benefit; most full-time employees get such benefits.

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

Group rates are lower because of economies of scale, ability

to pool risks and greater bargaining power of a group.Consolidated Omnibus Budget Reconciliation Act (COBRA)

requires employers to permit employees to extend health insurance coverage at group rates for up to 36months

following a qualifying event, such as termination.

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Retirement Plans

Defined Benefit• 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 fiduciary responsibilities of pension plan trustees, established vesting rights and portability provisions and established PBGC.

Defined Contribution• Does not promise employees

a specific benefit level upon retirement.

• Employers shift investment risk to the employee.

• 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

Profit-sharingEmployee Stock

Ownership

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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 % at a

predefined rate.

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Funding, Communication andVesting Requirements

Summary plan description (SPD) obligates employers to describe plan's funding, eligibility requirements, risks etc..

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

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

year period, with at least 20 %in the third year and each year thereafter.

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Pay for Time Not Worked

Vacation: Europe- 30 days of mandated vacation is common. U. S.- no legal minimum; 10 days is common.

Sick Leave Programs: provide full salary replacement for a limited period

of time, usually not exceeding 26 weeks. amount based on length of service, accumulating

with service.

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Family-Friendly Policies

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

Family and Medical Leave Act (FMLA): 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

Family and Medical Leave Act requires organizations with 50 or more employees within a 75-mile radius to provide as much as 12 weeks of unpaid leave after childbirth or adoption; to care for a seriously ill child, spouse, or parent; or for an employee’s own serious illness.

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 Company should know what competition is doing. Surveys information is available from private

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

Cost control Larger the benefit cost, greater the savings possibility. Growth rate of may result in serious future costs. Cost containment efforts work to 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 U. S. spends more on health care than any other countryHealth-care expenditures have risen from 5.3 % of GNP in

1960 to 15.3% today.Cost control attempts – by employers such as managed

care, fall into six major categories: 1. plan design2. use of alternative providers3. use of alternative funding methods4. claims review5. education and prevention6. external cost control systems

Trend - to shift costs to employees through 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 provide benefits on a prepaid basis.

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

Preferred Provider Organizations (PPOs)

• 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 justPPOs.

• less expensive than traditional health care but more expensive than HMOs.

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Employee Wellness Programs

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

2 Classes of EWP’s:

1. Passive -use little or no outreach to individuals and provide no ongoing motivational support.

2. Active- assume that behavior change requires not only awareness and opportunity, but also support and reinforcement.

3 Types of Employee Wellness Designs

1. Health education

2. Physical fitness fitness facilities

3. Follow-up model

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2 Phenomena in Cost Control Efforts

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Staffing Responses to Control Benefits Cost Growth

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

Classify employees as exempt, since they can 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.

Use market research methods to assess employees’ preferences 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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Communicating With Employees

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Flexible Spending Accounts

Permit employees to choose types and amount of benefits.

Advantages include: employees more aware and appreciative of their

benefits package better match between package and employee's

needs, which improves satisfaction and retention cost reductions

Disadvantages include: administrative cost adverse selection

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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.

Major advantage -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 women to contribute

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

40 in pay or benefits. Employees with disabilities have equal access to same

health insurance coverage as other employees.Monitoring Future Benefits Obligations– Financial

Accounting Statement (FAS) 106-any benefits (excluding pensions) provided after retirement cannot be funded on a pay-as-you-go basis; must be paid on an accrual basis.

Need to balance interests of shareholders, current employees, and retirees.

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Summary

Organizations less paternalistic employee benefit strategies. Employees have more responsibility and risk regarding benefits. Employers have greater reliance on defined contribution plans.

Such plans require employees to understand investing. Risk to employees is greater when defined contribution plans

invest a substantial portion of their assets in company stock. If the company has financial problems, employees risk losing

both their jobs and their retirement money. Companies have reduced or eliminated benefits giving more

responsibility to employees. Employees are being asked to increase the proportion of costs

that they pay and to use data on health care quality to make better choices about health care.

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