The Employer Flashcards
Why do employers offer benefits?
state related:
legislation: employers are often required by law to provide specific benefits, such as maternity leave or medical coverage.
tax: employers can take advantage of tax incentives by offering benefits like retirement funds or insurance policies.
recruit and retain: benefits can attract and retain good staff e.g. on-site daycare may appeal more to younger employees with children.
reward behaviour: use bonuses to reward top performers
maximise productivity: have cafeteria at work to ensure convenience and maximise time spent working.
manage retirement: ensure that old people retire at certain age to make room for young employee
competitiveness: attract talent in industries with skill shortages e.g. provide flexi working hours
paternalism: provide benefits to help employees manage risks they cannot do on their own e.g. offer housing to miners
control externalities: offer paid leave to avoid sick people from spreading their sickness at work.
reduce costs: buying group insurance, may be a lot cheaper than individual policies for employees.
Risks faced by employer when providing benefits
“active” balance-of-cost funds: employers bears interest rate risk, investment return risk and longevity risk
“active” adverse selection in flexible benefits: risk arises when employees choose the most valuable benefits, leading to higher insurance premiums and increased costs for the employer.
“sick” ill-health and disability benefits: risk arises if these benefits are not insured or pre-funded as employer responsible for claims. If insured, employers may face premium increases due to poor claims experience.
“sick” absenteeism without consent: risk arises if employees are absent without permission, as insurance may not cover them. Employers might have to pay these benefits themselves.
“exit” staff turnover: high turnover leads to increased administrative costs for retirement funds so employer may require you to work for certain period.
“retired” post-retirement obligations (DB pensions and medical insurance): costs can become difficult to manage, especially as medical costs rise or if benefits are not fully hedged.
Flexible benefits
- Flexible benefits allow employees to choose level of cover thus no longer squeeze on employees’ take-home pay due to rising benefit costs
- Allow employees to revise their packages each year, accommodating changing circumstances ( e.g., single, married, with or without dependants, young, or old)
- Employees can choose from a range of benefits, such as various health insurance plans or retirement fund options (DB vs. DC).
- Once a flexible benefits framework is established, adding new benefits can be done at minimal cost to the employer.
- Many employees underestimate their risk cover and retirement savings needs, often prioritizing immediate take-home pay, leading to insufficient coverage and savings.
- Employers typically set minimum levels of risk cover and retirement contributions; however, this can lead employees to choose only the minimum option.
- Allowing employees to increase coverage introduces anti-selection risk, affecting premium rates.
- Offering extensive choice can fragment risk pools, diminishing the benefits of group coverage and complicating the balance between employee wants and employer goals.
- Setting minimum benefit levels too low may result in inadequate protection for employees, especially in contexts with limited social assistance or insurance.
Risks faced by the employer
Ill-health and disability (managed through PMI):
- Employees slow in doing tasks due to illness
- Employees less productive while at work
- Average number of hours lower than those in good health
Absenteeism (managed through PMI and offering wellness programmes)
- Wages still paid to absent employees
- High cost of temporary replacement workers, paying overtime
- Admin costs of managing absenteeism
- Reduced productivity
- Excess manager time
Staff turnover (managed by encouraging long service through vesting periods or offering flexible benefits which can be catered for difference phases in life)
- Loss of institutional memory
- Cost associated with recruiting and training new staff
- Reduced productivity