McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved Employee Benefits and Services chapter 12

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved Indirect Financial Compensation - Benefits All employer-provided rewards and services (other than wages and salaries) arising from: legally required social insurance payments private insurance and retirement plans payment for time not worked extra cash payments other than bonuses based on performance employee services

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved Background (1 of 2) Most benefits and services are available to workers as long as they are employed by an organization regardless of seniority or performance Decisions about indirect compensation are more complex than those concerned with wages and salaries

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved Background (2 of 2) Employers face rising benefits costs resulting from: increased legislation insurers’ insolvency cost of advanced medical technologies aging workforce new immigration more women in the workforce global competition

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved Changes in Benefits Programs Then Nuclear families of working male with female and 2.3 children at home Employment for large part of career White male-dominated workforce Cradle-to-grave expectations Paternalistic employer Entitlement perception of benefits Low cost of benefits Protection for illness Single set of benefits Now Double-income families with and with- out children, and single-head families Multiple career industry, & job moves Multicultural workforce Portability issues Shared responsibility Benefits as part of total compensation Benefits costs escalating faster than CPI and employer’s ability to pay Promotion of wellness Cafeteria and customized benefits programs

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved The Role of Operating and HR Managers in Benefits and Services Benefits & Services Function Operating Manager (OM)HR Manager (HRM) Benefits & services budgetPreliminary budget approved or adjusted by top management Preliminary budget developed by HRM Voluntary benefits & servicesPrograms approved by OM (top management) Programs recommended by HRM Communication of benefits & services OM cooperates with HRMPrimary duty of HRM Evaluation of benefits & services Done by HRM Administration of benefits & services programs Done by HRM

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved Benefits and Services Programs Mandated Benefits Voluntary Benefits Income in Retirement Employee Services Flexible Benefits

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved Mandated Benefits Programs Unemployment Insurance Social Security Workers’ Compensation

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved Unemployment Insurance Unemployment tax paid by employer Unemployment tax rates, eligibility requirements, weekly benefits, and duration of regular benefits vary from state to state Employee receives compensation for a limited time – typically a maximum of 26 weeks

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved Social Security Retirement income Disability benefits Death benefits Survivor’s benefits 6.2% of eligible earnings up to $84,900 (2002) $87,000 (2003) Employee and employer funded Medicare Hospital insurance (Medicare, Part A) Medical Insurance (Medicare, Part B) 1.45% of eligible earnings (unlimited) Employee and employer funded

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved Workers’ Compensation (1 of 2) Based on the principle of liability without fault Employer absolutely liable for providing benefits to employees that result from occupational disabilities or injuries regardless of fault Employers assume costs of occupational injuries and accidents

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved Workers’ Compensation (2 of 2) Employers pay premium to insurance company or state fund experience-rated (5-10 year period) Disability must be work related Benefits include: medical care disability income rehabilitation death benefits

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved Voluntary Benefits Programs Insurance Protection Retirement Plans Compensation for Time Not Worked

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved Sick Leave Family Leave Maternity and Parental Leave Paid Vacations Personal Time Off Paid Holidays Compensation for Time Not Worked

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved Family Leave Policies Around the World CountryDuration of Leave (Weeks) Number of Paid Weeks Percent of Normal Pay Canada weeks60% France1816 weeks90% Germany – 19 weeks100% Japan1212 weeks60% Sweden weeks90%

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved Employer-Purchased Insurance Health Insurance Life Insurance Disability Income Replacement

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved Health Insurance (1 of 2) Traditional membership programs Pay for both physician and hospital expenses as these costs are incurred Approach is not preventive Health maintenance organizations (HMO) Outpatient and hospital coverage offered for a fixed monthly fee Prepayment for comprehensive health care that promotes preventive care

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved Health Insurance (2 of 2) Preferred provider organizations (PPO) Health care plan based on agreements between doctors, hospitals, and other related medical service facilities with an employer or an insurance company Services provided for a fixed fee Incentives to use selected providers Emphasis on cost control

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985 Section 162 (k) stipulates that employers with more than 20 employees are required to offer continuation of health coverage for 18 to 36 months after termination of an employee At the employee’s expense

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved Simplified Employee Pension IRAs 401 (k) Plans Private Pensions Retirement Income from Savings & Work Individual Retirement Accounts (IRAs) Income in Retirement Programs

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved Government Regulation of Private Pensions Employment Retirement Income Security Act (ERISA) of 1974 (as subsequently amended) Eligibility requirements Benefits formula Vesting Portability Fiduciaries Reporting/disclosure

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved Pension Benefits Defined benefit pension plan Specifies the benefit employees will receive at retirement Defined contribution pension plan Specifies the employer’s contribution Cannot predetermine the employee’s actual pension benefit

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved Employee Services Stock Ownership Plans Education Programs Financial Services Childcare Eldercare Pre-retirement Programs Social and Recreational Programs

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved Flexible Benefits (Cafeteria) Plans Allow employees to choose between two or more types of benefits Common choices include: health care life insurance disability insurance option of receiving cash to spend on coverage in the open market

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved Reimbursement Accounts Also known as flexible spending accounts Provide funds from which employees pay for expenses not covered by the regular benefits package Usually pretax deductions Funds can be allocated for: unreimbursed health care childcare care for elderly or disabled relatives

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved Managing an Effective Benefits Program Step 1: Set Objectives and Strategy for Benefits Pacesetter strategy Comparable benefits strategy Minimum benefits strategy Step 2: Involve Participants and Unions Step 3: Communicate Benefits Step 4: Monitor Costs Closely

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved Cost Analysis of Benefits 1. Total cost of benefits annually for all employees 2. Cost per employee per year basis 1 divided by number of employee hours worked 3. Percentage of payroll basis 1 divided by annual payroll 4. Cost per employee per hour basis 2 divided by employee hours worked

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved Summary (1 of 2) Top managers must consider the following when making decisions about benefits: Mandated programs must be funded There is little evidence that benefits and services really motivate performance Benefits do not necessarily increase satisfaction Most employees view benefits and services as entitlements

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved Summary (2 of 2) Unions, competitors, and industry trends continue to pressure employers to provide or increase voluntary benefits Costs of benefits and services continue to escalate dramatically To avoid administrative nightmares, employers should concentrate on fewer benefits plans If possible, implement those preferred by most employees