Employee Benefits

© Nancy Brown Johnson, 2005

Typical Benefits

• Applied Signal Technology - Employee Benefits

Benefits Are:

• Driven by tenure & entitlement– Difficult to reward factors such as

teamwork• Not flexible

– Difficult to change to reflect priorities• Difficult to use strategically

– cannot tailor to fit organizations needs• Does not tend to motivate

So why do firms give benefits?

• Legal Compliance• Tend to become Institutionalized &

Expected• Basic level of Employee Protection• Tax advantages• Group rate advantages

©a Times Mirror Higher Education Group, Inc., company, 1997a Times Mirror Higher Education Group, Inc., company, 1997

IRWIN

Percentage

1929 55 65 75 86 90 95 98 00 03

40%

30%

20%

10%

3.0

17.0

21.5

30.0

35.5

41.2 42.0 37.2 37.637.9

Benefits Growth

Chamber of Commerce Survey Results

Reasons for Growth

• New Deal legislation• Wage and price controls

– -WW II

• Inflationary Benefit Costs

Legally Mandated Benefits

Social SecurityAbout 8% employer and employee tax on

wagesAdditional Medicaid tax of 1.45%President’s proposalCounter reactions

Unemployment CompensationExperienced based taxEligibility: work 1 year - not on strike, quit or

fired for cause Workers Compensation

Disability,medical care, death benefit & rehabilitation

Experienced based taxFamily and Medical Leave Act

©a Times Mirror Higher Education Group, Inc., company, 1997a Times Mirror Higher Education Group, Inc., company, 1997

IRWIN

Benefit Planning Issues

• What is the role of benefits in compensation?– Attraction, Retention, Motivation– External Competitiveness– Cost control

Private Insurance

• Health– Cobra must continue– Trend is for employers to shift more

of cost to employees

• Life• Short & Long Term Disability• Nursing home

Health Care

0%

2%

4%

6%

8%

10%

12%

14%

1996 1997 1998 1999 2000 2001 2002

Health Insurance Premiums Medical Inflation

Overall Inflation Workers' Earnings

Source: Kaiser Family Medical Foundation, 2002.

Retirement

©a Times Mirror Higher Education Group, Inc., company, 1997a Times Mirror Higher Education Group, Inc., company, 1997

IRWIN

Defined Benefit •retirement income level is specified•employer assumes risk

Defined Contribution•amount contributed to retirement defined•employee assumes risk•Retirement confidence survey

Defined BenefitExpected Present Value of Pension

Assumes Pension=500*years of service1. Benefit value=0 if quits, the day starts2. Benefit value=0 if works until deathValue

Retirement Age

9030 70

Defined Contribution

Expected Present Value of PensionExpected Pensions do not depend upon

number of years left in person’s lifeBenefits keep growing

Value

Retirement Age

9030 70

So What is the Incentive to Retire?

• Defined benefit plan-– around 67 in the example where the gains

to retirement exceed gains to working

• Defined contribution plans – incentive keeps working

• How do you encourage workers to retire?– cash by out– defined benefit plan

Vesting

• Military-no pension until 20 years of service• Separations high at beginning but non-existent

at 17-19 years of service, then very high again at 20 years

AnnualPensionBenefits

Years of Service20

ERISA (1974)

• funding• vesting• communication• portability-values do not

change when employer changes

• funding• vesting• communication• portability-values do not

change when employer changes

©a Times Mirror Higher Education Group, Inc., company, 1997a Times Mirror Higher Education Group, Inc., company, 1997

IRWIN

Value of Savings at 65(Millions of Dollars)

1.00

0.75

0.50

0.25

$837,434

$357,003

21-29 31-39 21-29 31-39

$128,253$214,957

It pays to save early and take some risk

Investment portfolio (60% stocks, 30% bonds, 10% cash)

Investment portfolio of 100% cash(money market )

Value of savings for different portfolios

Savings Calculator

Payment for Time Not Worked

• Vacations– not mandated in US– 30 days mandatory in Europe– share in work– Japanese work more hours

• Holiday Pay• Sick Leave: no fault system• Family & Medical Leave

Paid Time Off

• Paid leave makes workers take time that they might not choose to take

• Option pay higher wages and let the workers decide if they want to work

Why do firms give paid time-off?

• Banks to find out what is going on?• Team production: to get everyone

synchronized• Rest to be more productive

Source: U.S. Chamber of Commerce Research Center, Employee Benefits 1990 (Washington DC: U.S. Chamber of Commerce, 1991).

Annual Hours

3000

2000

1000

Japan UnitedStates

France Germany

20801912

1771 1667

Average Hours Worked in Manufacturing

Employee Benefits in 1993 by Category

Source: Adapted from the U.S. Chamber of Commerce Research Center,Employee Benefits (Washington,DC: U.S. Chamber of Commerce), 1991, 1994.

25.2%

Payment for timenot worked

28.3%

Medical & other insurance

21.1%

Legallyrequired

16.0%Retirement

plans

Paid rest periods (5.6%)

Miscellaneous (3.8%)

Benefits as % of payroll

equals 41.3%

Benefits as % of payroll

equals 41.3%

Managing Benefits

• Survey & Benchmarks• Cost control

– managed care– co-insurance– HMO or PPO

• Workforce Demographics• Communicating with Employees

Wages v. Benefits

• Value -the amount an individual is willing to pay for a good or service– if price is too high, the worker wouldn’t buy

• Worker may be willing to pay more for the benefit than it costs (e.g., group rates, taxes)

• Willingness to trade wages for benefit– Salary = 55,827-1836(Health Plan)– Salary with health plan $53,991

Employees Undervalue Benefits

• Unaware of costs• Every benefit does not suit every

worker

Flexible Benefit Plans (Cafeteria)

• Workers get more value• Helps make employees more aware of

benefit costs• Addresses different employees needs• Maybe reduce some costs for benefits

not needed• Increased design and administrative

costs

Benefits & Sorting

• The benefit package signals the type of worker– life insurance-older worker– day care - family oriented worker– tuition - worker willing to get education

• Cafeteria Plan – weaker signal

• Adverse Selection– health insurance would attract sicker

families– these people apt to be less productive

Social Traps

Some benefits may hurt people intend to help

Examples:Work/family benefits

Help to recruit women with familiesMay hurt women’s career paths

InsuranceMay not hire sicker employeesDrive up insurance costs

Benefits Can be Made More Effective

• Cost sharing• Aggressive Cost Management• Engaging Employees in Benefit

Choices• Target specific benefits to make

workforce more productive– childcare, wellness, employee

assistance

Benefit Summary

• Benefits usually do not motivate• Usually viewed as entitlement• Benefits may help attraction and

retention• Often undervalued by employees• Communication important in the

process