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12-1

The Benefits Determination

Process

Chapter

12

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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 . . .

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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

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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?

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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

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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?

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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