Chapter 4 Flashcards
State the reasons why employers offer benefits as part of compensation packages. [4]
- Legislation✓. Benefit provision may be required by law✓, for example, maternity leave✓.
- Tax incentives✓ may be available for employers and/or employees✓
For example, certain benefits, like health insurance or retirement contributions✓, can provide tax advantages for both the employer and employees. Employers may be able to deduct these expenses as business costs✓, while employees may benefit from tax-free contributions✓. - Recruiting and retaining the ‘right’ kind of employees.✓✓
- Investing in employee benefits can lead to lower turnover rates.✓ High turnover can be costly due to recruitment and training expenses, so benefits can be a cost-effective way to retain employees.✓✓
- Rewarding behaviour, for example, with incentives ✓✓
- Competitiveness ✓
- Paternalism ✓
- Maximising productivity✓, for example benefits like health insurance, wellness programs, and mental health support✓✓ contribute to employees’ overall well-being. This can lead to a healthier, more productive workforce✓✓.
- Managing employee retirement
- Controlling externalities✓, for example, other staff may be affected by employees who fall ill and do not have medical insurance✓✓
- Offering benefits can boost✓ employee morale and job satisfaction✓. Employees who feel supported and valued are more likely to be engaged and motivated✓✓.
- Reducing administration and other costs✓, for example, the employer may be able to offer benefits at a lower cost than if employees sought out the benefit themselves✓
- The employer is the ideal provider of certain benefits✓, such as loans to employees✓ and group benefits✓
Define the terms
a) Basic Salary
b) CTC [2]
a) Basic Salary is the amount that a person earns✓ before any additional benefits are added✓, such as retirement fund contributions✓.
b) Cost to Company describes the total cost to the company to employ someone✓✓. This would include the cost of additional benefits✓, such as a retirement fund and UIF contributions, medical scheme, and life insurance✓✓. (Lekker RUM)
Define the following terms:
a) Net salary and
b) Pensionable Salary [2.5]
a) Net Salary or take-home pay✓ is the amount that is deposited into a person’s bank account✓ after deducting all additional benefits✓ as well as tax✓. This is what is available to a person to spend or save at the end of every month.✓✓
b) Benefit or pensionable salary is the salary that is used to calculate the benefit✓, such as retirement fund contribution✓ or level of life cover✓, in respect of an employee. This may exclude variable elements of a person’s income✓, such as commission✓.
Provide examples of how an employer may use benefits to incentivise the right kind of behaviour. [4]
- Correctly structured bonuses✓ can be used to incentivise individual effort✓ and can promote teamwork ✓and a sense of collective responsibility✓.
- The presence of benefits only at a specific salary ‘level’✓ may encourage individuals to work for promotion✓ and reward efforts✓.
- Retirement funds with vesting periods✓ may encourage workers to stay longer✓ and leave at certain times✓.
- Final salary defined benefit (DB) retirement funds✓ may reward people who have steeper earnings profiles✓, such as managers✓, more than people who have flatter earning profiles✓, such as blue-collar staff✓.
- Matching contributions in defined contribution (DC) funds✓✓ may encourage employees to save more✓.
- Health and Wellness Benefits✓: Providing wellness programs, gym memberships, or health screenings✓✓ can encourage employees to adopt healthier lifestyles✓. Incentives such as reduced health insurance premiums for meeting certain wellness goals✓ can further motivate employees to engage in health-positive behaviours✓.
- Professional Development Opportunities✓: For instance, offering sponsorship for industry conferences✓ can motivate employees to pursue growth and apply new knowledge to their roles✓.
Question 4.1 Why might an employer grant career breaks to employees as part of a total remuneration package. [4]
Solution to Question 4.1
l Employers may want to attract staff with certain characteristics such as the desire for a work-life balance, the desire to study further, the desire to be creative, or devote time to charity work.
l It may be used as an incentive. l It may promote creativity, for example, in knowledge industries or creative industries (advertising).
l It may be required by gender-equality legislation. l There may be tax advantages for offering this particular benefit. l This may allow employers to help manage workload, for example, by making this a flexible benefit, workers essentially pay to take time off during times when workload is low.
l It helps retain talent within an organisation as otherwise the employee may have had to resign.
l It may help reduce externalities created by staff with other interests trying to perform a full day of work while pursuing other interests.
Question 4.3
Briefly outline why benefits offered through an employer-sponsored scheme cost less than an individual arrangement.[2]
Solution to Question 4.3
The employment arrangement might offer lower benefits than the individual arrangement. However, one might expect the same relationship for the same level of cover as: l Employer arrangements enjoy more significant economies of scale.
l Group life insurance arrangements are usually cheaper due to reduced scope for adverse selection. (This may be particularly true for older or more unhealthy individuals whose individual rates may be significantly higher than the rate for the full group.)
Shared administration systems and lower sales and marketing costs than an individual-based system, leading to better-value benefits.
F108 J2021 Q3(i)
F108 J2021 Q7(i)
A company’s employee benefits manager is reviewing the benefits package offered by the company in response to concerns that money is being spent on benefits that are not valued by employees.
(i) Outline how a flexible benefits arrangement might address these concerns. [3]
Exam Question - Example from lecturer
A flexible benefit scheme is a form of benefit provision where the beneficiary has choice about
* The types of benefits [½]
* And the level of benefits [½]
* It will usually involve an option to receive salary instead of other forms of benefits [½]
* It allows individuals to select the benefits that best meet their needs [½]
* For example … risk benefits / childcare vouchers / … [½]
* And therefore they should appreciate the benefits more [½]
* Individual needs may be different for different parts of the workforce… [½]
* … Or may change over time as personal circumstances change [½]
* For example … e.g. getting married / having children / … [½]
* The employer can change the benefits offered at little or no cost [½]
* Any exchange terms for switching between benefits will provide a value so employees can understand / appreciate their value better [½]
The company is proposing to establish a defined contribution pension fund for its employees and the manager wishes to ensure that the fund provides members with choice and flexibility.
(ii) Describe the flexibilities that may be made available to fund members in the design of the defined contribution pension fund. [6]
Exam Question - Example from lecturer
Contributions
* Members could choose the amount they wish to contribute [½]
* The employer may match employee contributions [½]
* The member may be able to transfer in funds from another arrangement [½]
Investment
* Members can select which funds to invest in [½]
* And the amount of investment risk they wish to take [½]
Benefits
* Members could choose the age at which benefits are taken [½]
* Including preserving benefits in-fund [½]
* Members can have options on how to receive their benefit at retirement. For example: [½]
* Take it as a cash lump sum [½]
* Purchase an annuity from an insurer / within the scheme … [½]
* … where the level of pension increases secured … [½]
* … or the level of dependant benefits secured are determined by the member [½]
* Income drawdown [½]
* Member may vary the level of protection benefits [½]
Discuss the implications associated with adopting the flexibilities identified in part (ii).
i.e. flexibilities that may be made available to fund members in the design of the defined contribution pension fund
Exam Question - Example from lecturer
Contributions
* Members may pay insufficient contributions to provide adequate provision [½]
* Which could lead to reputational issues for the company. [½]
* There may be regulatory restrictions… [½]
* …For example limits on what level of contributions qualify for tax relief [½]
* …Or minimum requirements to ensure adequacy of retirement savings [½]
* If contribution matching, the company is exposed to the risk that members increase their contributions… [½]
* …So may introduce an employer contribution beyond which no matching occurs [½]
Investment
* Members may make unsuitable investment choices [½]
* Because they may not understand the risks [½]
* There is a risk the member will have insufficient funds on retirement to meet their needs [½]
* For example investing in funds which are overly prudent and therefore limit investment growth [½]
* Or funds that do not appropriately match the benefits that will be taken at retirement [½]
* Or risky assets that default [½]
* Therefore the choice of investments may be limited [½]
* Or financial advice / guidance provided for members [½]
* Although this could increase the costs of providing the benefit [½]
Investment (cont…)
* A default fund may be required for members that do not engage with the investment flexibilities [½]
* This may include a life-styling element [½]
* To reduce the volatility of retirement outcomes [½]
Benefits
* Members can tailor the level and form of benefits to best meet individual needs [½]
* For example if the member is married or not or takes into account their health [½]
* There is a risk that members will make inappropriate benefit choices [½]
* For example drawdown at too high a level so they run out of funds before death [½]
General
* Additional flexibilities increase administrative complexity (and therefore cost) [½]
* And may make communication more difficult [½]
* Could increase employee engagement as they can better tailor benefits to their needs [½]
* But could decrease engagement if the number of decisions to make becomes overwhelming [½]
List the advantages and disadvantages to the employer of providing flexible benefit packages.[]
Chapter solution 2 Advantages:
l Offering flexible benefit packages may increase employee satisfaction and will help to recruit and retain staff members.
l By allowing employees to be involved in the make-up of their benefits, it may assist in developing their understanding of the benefit package.
l A better understanding of benefit packages may lead to a better appreciation of the value of the benefits being offered.
l Benefit costs can be better controlled if employees are given the option to select various types and levels of benefits within a fixed-cost constraint.
Disadvantages: l Employees may favour low-cost benefits and higher take-home pay; this defeats the employer’s objective in providing benefits.
l Flexible benefit packages are likely to be administratively more complex to run. l Employees may not have the appropriate level of financial sophistication to make benefit choices, and the employer may be blamed if there is dissatisfaction when benefits are ultimately paid.
l The employer may have to provide and pay for professional advice to employees to ensure that they make appropriate benefit selections.
