HRM gaining a competitive advantage noe ch013

Human Resource Management:
Gaining a Competitive Advantage

Chapter 13
Employee Benefits

McGraw-Hill/Irwin

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


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 taxes

Large groupV. individual insurance
Organized labor
Employer differentiation

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Benefit Programs
Social Insurance

Family-Friendly
Policies

Pay For Time Not

Worked

Private Group
Insurance

Retirement

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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.
2.
3.
4.



1.
2.
3.
4.

offset lost income during involuntary unemployment
help unemployed workers find new jobs
provide an incentive for employers to stabilize employment
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
have a prior attachment to the workforce
are available for work
are actively seeking work
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.

2.
3.
4.

disability income
medical care
death benefits
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

Employee Stock
Ownership

Profit-sharing

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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 and
Vesting 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 country
 Health-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.
2.
3.
4.
5.

6.

plan design
use of alternative providers
use of alternative funding methods
claims review
education and prevention
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)

Preferred Provider
Organizations (PPOs)

• 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.

• 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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