Chapter 12: The Benefit Determination Process Flashcards
Define employee benefits.
Part of the total compensation package, other than pay for time worked, provided to employees in whole or in part by employer payments (example life insurance, pension, workers compensation, vacation).
Why have employee benefits grown?
- During both World War 2 and the Korean War, the federal government instituted strict wage and price controls. The compliance agency charged with enforcing these controls was relatively lenient and permitting reasonable increases in benefits.
- Unions: Several National Labor Relations board rulings during the 1940s freed unions to negotiate over employee benefits. Little freedom to raise wages during the war, unions fought for the introduction of new benefits and the improvement and existing benefits.
- Employer impetus: Many of the benefits in existence today were provided at employer initiative. Traced to pragmatic concerns about employee satisfaction and productivity. .
- Cost effectiveness of benefits: cost effectiveness in two situations. The first cost is that most employee benefits are not taxable. A second cost effective component of benefits arises because many group based benefits can be obtained at a lower rate than could be obtained by employees acting on their own such as life, health, and legal insurance.
- Government impetus: three employee benefits mandated by either the state or federal government: workers compensation, unemployment insurance, and Social Security.
Discuss the value of employee benefits.
- Medical benefits continue to be ranked top and importance for most employee groups.
- Employees are not aware of, or undervalue, the benefits provided by their org.
- Companies cutting back benefits, or shifting cost to ee, air of entitlement disappearing. Both employees and HR professionals see benefits as the top factor driving job satisfaction.
- EEnot looking for more benefits, but for greater choice in benefits they receive.
- Evidence indicates employers are making efforts to educate employees about benefits, with an outcome of increased employee awareness.
- Value of benefits needs to be communicated to employees.
What are key issues regarding the planning, design, and administration of benefits?
• Planning and design issues:
o integrate benefits with other compensation components.
o Planning process also should include strategies for ensuring external competitiveness and adequacy of benefits.
No magic formula for defining benefit adequacy. The answer may lie in the relationship between benefit adequacy and the third plan objective: cost of effectiveness.
• Benefit administration issues:
o who should be protected or benefited?
Variety of employees with different employment statuses. Should these individuals be treated equally with respect to benefit coverage?
o How much choice should employees have among an array of benefits?
o How should benefits be financed?
o Are your benefits legally defensible?
What is a flexible benefit plan/program? Be able to list the associated advantages and disadvantages discussed in your textbook.
• Benefit package in which employees are given a core of critical benefits (necessary for minimum security) and permitted to expend the remainder of their benefit allotment on options that they find most attractive.
• Advantages:
o employees choose packages that best satisfy their unique needs.
o flexible benefits help firms meet the changing needs of changing workforce.
o increased involvement of employees and families improves understanding of benefits.
o flexible plans make introduction of new benefits less costly. Any new option is added merely as one among a wide array of elements from which to choose.
o cost containment: organization sets dollar maximum; Employee chooses within that constraint.
• disadvantages:
o employees make bad choices and find themselves not covered for predictable emergencies.
o administrative burdens and expenses increase.
o adverse selection: employees pick only benefits they will use; The subsequent high benefit utilization increases its cost.
o flexible benefit plans are subject to nondiscrimination requirements in section 125 of the Internal Revenue Code.
Study Exhibit 12.5 and related content: discuss the employer and employee factors influencing the choice of benefit package.
• Employer factors:
o relationship to total compensation cost
Employee benefit cost is part of the total package of compensation cost. Benefit costs are only one part of the total compensation package. Decisions about outlays have to be considered from this perspective: is there a better use of this money? Could we put the money in some other compensation component and achieve better results?
o cost relative to benefits
To control spiraling benefit costs, administrators should adopt A broader, cost centered approach. As a first step, this approach would require policy decisions on the level of benefit expenditures acceptable both in the short and long run.
A cost centered approach would require that benefit administrators, and cooperation with insurance carriers and armed published forecasts of anticipated costs for a particular benefit, determine the cost commitments for the existing benefit package. Factors affecting this decision include an evaluation of benefits offered by other firms and the competitiveness of the existing package.
o competitor offerings
Benefits must be externally equitable: what is the absolute level of benefit payments relative to the important product and labor market competitors? A policy decision must be made about the position the organization wants to maintain in its absolute level benefits relative to the competition.
Conduct a benefit survey.
o role of benefits in attraction, retention, motivation
Retention: employee benefits are widely claimed to help in the retention of workers. Benefits schedules are specifically designed to favor long term employees. Retirement benefits increase vacation amount increases with tenure etc.
Employee turnover tied to pensions and medical coverage, virtually no other employee benefit had a significant impact on turnover.
Benefits also might be valued if they could prove they increase employee satisfaction. Benefits would be valuable if they could show a link and increase productivity: no strong data exists linking benefits level and employee productivity. Result: companies are cutting benefits especially medical insurance as a cost reduction strategy.
o legal requirements
legislation: Fair Labor Standards act 1938, employee retirement income Security Act of 1974, tax reforms of 1982 and 1986.
maintenance act of 1973: discrimination legislation, consolidated omnibus budget, family medical leave act, the Patient Protection and Affordable Care Act
• employee factors:
o equity: fairness historically and in relationship to what others receive.
Perceived fairness as a factor that must be considered in determining employee needs.
Bandwagon effect new benefits offered by a competitor or adopted without careful consideration, simply because the employer wants to avoid hard feelings.
o personal needs as linked to age, sex, marital status, number of dependents.
Gauge employee preferences by looking at demographic differences.
Most preference studies show wide variation individuals with respect to benefits desired.
Surveying individuals about needs, requires development of a questionnaire on which employee evaluate various benefits.
Another empirical method of identifying individual employee preferences is commonly known as a flexible benefit plan our cafeteria style plan.
Study Exhibit 12.6: be able to discuss the legislation that’s impacted benefits.
• Legislation:
o Fair labor standard act of 1938: create a time and a half over payment pay period benefits linked to pay (e.g. Social Security) increase correspondingly with those overtime hours.
o Employee retirement income Security Act 1974: if an employer decides to provide a pension (it is not mandated), specific rules must be followed. Plan must vest (employee has the right to both personal and company contributions into pension) after five years employment. Pension benefit guarantee corporation, as set up by this law, provides worker some financial coverage when a company and its pension plan go bankrupt.
o Tax reforms - 1982, 1986: permit individual retirement accounts (IRAs) for eligible employees. Established 401K programs, and matched contribution saving plan (employer matches part or all of employee contribution) that frequently serves as part of a retirement package.
• Maintenance act 1973:
o discrimination legislation (age discrimination in employment act, Civil Rights Act, pregnancy disability act, various state laws): benefits must be administered in a manner that does not discriminate against protected groups (on basis of color, race, religion, sex, national origin, age, pregnancy).
o Consolidated omnibus budget reconciliation act (COBRA) 1984: employees who resign or are laid off through no fault of their own are eligible to continue receiving health coverage under employers plan at a cost borne by the employee.
o Family medical leave act 1993: mandates 12 weeks of leave for all workers at companies that employ 50 or more people.
o the Patient Protection and Affordable Care Act 2010: requires individuals to maintain minimal essential health insurance coverage or pay for a penalty unless exempted for religious benefits or financial hardship. Employers must enroll new employees or face a levy.
