Chapter 12Chapter 12

Indirect Compensation: Employee Benefit Plans

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All

rights reserved.

Questions This Chapter Will Help Managers AnswerQuestions This Chapter Will Help Managers Answer

What strategic considerations should guide the design of benefits programs?

What options are available to help a business control the rapid escalation of health care costs?

Should companies offer a uniform “package” of benefits, or should they move to a flexible plan that allows employees to choose the benefits that are most meaningful to them, up to a certain dollar amount?

Questions This Chapter Will Help Managers Answer Questions This Chapter Will Help Managers Answer (contd.)(contd.)

What cost-effective benefits options are available to small business? In view of the considerable sums of money that are spent each year on

employee benefits, what is the best way to communicate this information to employees?

Questions Relating to Benefits That Managers Questions Relating to Benefits That Managers Should AddressShould Address

Are the type and level of our benefits coverage consistent with our long-term strategic business plans?

Given the characteristics of our workforce, are we meeting the needs of our employees?

What legal requirements must we satisfy in the benefits we offer? Are our benefits competitive in cost, structure, and value to employees and

their dependents? Is our benefits package consistent with the key objectives of our total

compensation strategy, namely, adequacy, equity, cost control, and balance?

Benefits – Legal RequirementsBenefits – Legal Requirements

The doctrine of constructive receipt holds that an individual must pay taxes on benefits that have monetary value when the individual receives them.

Benefits – Legal RequirementsBenefits – Legal Requirements

The antidiscrimination rule holds that employers can obtain tax advantages only for those benefits that do not discriminate in favor of highly-compensated employees

Categories of BenefitsCategories of Benefits

Security and health

Payments for time not worked

Employee services

Security and Health BenefitsSecurity and Health Benefits

Life insurance Workers’ compensation Disability insurance Hospitalization, surgical, and

maternity coverage Health maintenance

organizations (HMOs) Other medical coverage

Sick leave Pension plans Social Security Unemployment insurance Supplemental unemployment

insurance Severance pay

Types of Insurance PlansTypes of Insurance Plans

1.Contributory – employees share in the cost of premiums

2.Noncontributory – employer pays the full cost of the premiums

Life Insurance Flexible Benefits ProgramsLife Insurance Flexible Benefits Programs

Typically such programs provide a core of basic life coverage (e.g., $25,000) and then permit employees to choose greater coverage (e.g., in increments of $10,000 to $25,000) as part of their optional package

Features of State Workers’ Compensation LawsFeatures of State Workers’ Compensation Laws

Coverage is provided regardless of who caused the injury or illness Payments are usually made through an insurance program financed by

employer-paid premiums A worker’s loss is usually not covered fully by the insurance program Workers’ compensation programs protect employees, dependents,

dependents, and survivors against income loss resulting from total disability, partial disability, or death; medical expenses; and rehabilitation expenses

Health-Care Costs and Company CompetitivenessHealth-Care Costs and Company Competitiveness

1. Their workforces are comprised largely of people in their 40s and 50s, who require more health care than younger workers do

2. Their health plans cover a much larger number of retired workers than do those of newer companies, like computer or airline concerns

3. They make products that must compete in world markets

Competitiveness issues arising from health-care costs are particularly acute at companies with the following three characteristics:

Health-Care Cost Containment Strategies of Health-Care Cost Containment Strategies of CompaniesCompanies

1. Band together with other companies to form a “purchasing coalition” to negotiate better rates with insurers

2. Deal with hospitals and insurers as with any other suppliers

3. Introduce a three-tier plan to encourage the use of generic drugs

4. Offer incentives to nudge working spouses off company health plans

5. Adopt a consumer-driven health plan (CDHP)

Why Health-Care Cost Gains Have Not LastedWhy Health-Care Cost Gains Have Not Lasted

Much of the progress came from eliminating unnecessary procedures and hospitalizations – a one time savings. At the same time,

An explosion of new medical technologies and drug treatments has jacked up prices again

The population has also aged, further spiking expenses Hospitals and doctors have refused to accept reduced reimbursement

rates. Lastly, Employees have rebelled against managed-care limits on doctors and

procedures

Types of Pension PlansTypes of Pension Plans

Defined-benefit plan: Under this plan, an employer promises to pay a retiree a stated pension, often expressed as a percentage of pre-retirement pay

Types of Pension Plans Types of Pension Plans (contd.)(contd.)

Defined-contribution plans: These plans fix a rate for employer contributions to the fund. Future benefits depend on how fast the fund grows.

Types of Pension Plans Types of Pension Plans (contd.)(contd.)

Cash balance plan: Under this plan, everyone gets the same, steady annual credit toward an eventual pension, adding to his or her pension account “cash balance.”

Table 12-4Table 12-4 Average 2004 Social Security Benefits - Average 2004 Social Security Benefits - MonthlyMonthly

Retired worker $922

Retired couple $1,523

Disabled worker $862

Disabled worker with a spouse and child $1,442

Widow or widower $888

Young widow or widower with two children $1,904

Figure 12-4Figure 12-4 Where Retirees Get Their IncomeWhere Retirees Get Their Income

Social Security38%

Retirement Plans18%

Savings/Asset Income18%

Earnings23%

Other3%

Payments for Time Not WorkedPayments for Time Not Worked

Vacations Holidays Reporting time

Personal excused absences Grievances and negotiations Sabbatical leaves

Examples of Employee Services Examples of Employee Services (selected)(selected)

Tuition aid Credit unions Food service Company car Career clothing Child care Elder care Gift matching

Stock-purchase plans Christmas bonuses Social activities Referral awards Merchandise purchasing Transportation and parking

Costing BenefitsCosting BenefitsMethodsMethods

Annual cost of benefits for all employees

Cost per employee per year

Percentage of payroll

Cents per hour

Figure 12-5Figure 12-5 Distribution of Flexible Work ArrangementsDistribution of Flexible Work Arrangements

Compressed workweek

29%

Flextime50%

Full-time telework16%

Other5%

Key Terms Discussed in This ChapterKey Terms Discussed in This Chapter

Doctrine of constructive receipt Antidiscrimination rule Contributory plans Noncontributory plans Yearly renewable term insurance Flexible benefits Workers’ compensation programs Long-term disability Disability management

Managed health Direct contracting Managed care Gatekeeper HMO Point-of-service plan Pension Defined-benefit plan Defined-contribution plan Cash-balance plan

Key TermsKey Terms (contd.)(contd.)

Grandfather clause Cost shifting Cafeteria benefits Flexible spending accounts