Indirect Compensation: Employee Benefit Plans Chapter 12 Indirect Compensation: Employee Benefit Plans McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Questions This Chapter Will Help Managers Answer What strategic considerations should guide the design of benefits programs? What options are available to help a business control the rapid escalation of health care costs? Should companies offer a uniform “package” of benefits, or should they move to a flexible plan that allows employees to choose the benefits that are most meaningful to them, up to a certain dollar amount?

Questions This Chapter Will Help Managers Answer (contd.) What cost-effective benefits options are available to small business? In view of the considerable sums of money that are spent each year on employee benefits, what is the best way to communicate this information to employees?

Questions Relating to Benefits That Managers Should Address Are the type and level of our benefits coverage consistent with our long-term strategic business plans? Given the characteristics of our workforce, are we meeting the needs of our employees? What legal requirements must we satisfy in the benefits we offer? Are our benefits competitive in cost, structure, and value to employees and their dependents? Is our benefits package consistent with the key objectives of our total compensation strategy, namely, adequacy, equity, cost control, and balance?

Benefits – Legal Requirements The doctrine of constructive receipt holds that an individual must pay taxes on benefits that have monetary value when the individual receives them.

Benefits – Legal Requirements The antidiscrimination rule holds that employers can obtain tax advantages only for those benefits that do not discriminate in favor of highly-compensated employees

Categories of Benefits Security and health Payments for time not worked Employee services

Security and Health Benefits Life insurance Workers’ compensation Disability insurance Hospitalization, surgical, and maternity coverage Health maintenance organizations (HMOs) Other medical coverage Sick leave Pension plans Social Security Unemployment insurance Supplemental unemployment insurance Severance pay

Types of Insurance Plans Contributory – employees share in the cost of premiums Noncontributory – employer pays the full cost of the premiums

Life Insurance Flexible Benefits Programs Typically such programs provide a core of basic life coverage (e.g., $25,000) and then permit employees to choose greater coverage (e.g., in increments of $10,000 to $25,000) as part of their optional package

Features of State Workers’ Compensation Laws Coverage is provided regardless of who caused the injury or illness Payments are usually made through an insurance program financed by employer-paid premiums A worker’s loss is usually not covered fully by the insurance program Workers’ compensation programs protect employees, dependents, dependents, and survivors against income loss resulting from total disability, partial disability, or death; medical expenses; and rehabilitation expenses

Health-Care Costs and Company Competitiveness Competitiveness issues arising from health-care costs are particularly acute at companies with the following three characteristics: Their workforces are comprised largely of people in their 40s and 50s, who require more health care than younger workers do Their health plans cover a much larger number of retired workers than do those of newer companies, like computer or airline concerns They make products that must compete in world markets

Health-Care Cost Containment Strategies of Companies Band together with other companies to form a “purchasing coalition” to negotiate better rates with insurers Deal with hospitals and insurers as with any other suppliers Introduce a three-tier plan to encourage the use of generic drugs Offer incentives to nudge working spouses off company health plans Adopt a consumer-driven health plan (CDHP)

Why Health-Care Cost Gains Have Not Lasted Much of the progress came from eliminating unnecessary procedures and hospitalizations – a one time savings. At the same time, An explosion of new medical technologies and drug treatments has jacked up prices again The population has also aged, further spiking expenses Hospitals and doctors have refused to accept reduced reimbursement rates. Lastly, Employees have rebelled against managed-care limits on doctors and procedures

Types of Pension Plans Defined-benefit plan: Under this plan, an employer promises to pay a retiree a stated pension, often expressed as a percentage of pre-retirement pay

Types of Pension Plans (contd.) Defined-contribution plans: These plans fix a rate for employer contributions to the fund. Future benefits depend on how fast the fund grows.

Types of Pension Plans (contd.) Cash balance plan: Under this plan, everyone gets the same, steady annual credit toward an eventual pension, adding to his or her pension account “cash balance.”

Table 12-4 Average 2004 Social Security Benefits - Monthly Retired worker $922 Retired couple $1,523 Disabled worker $862 Disabled worker with a spouse and child $1,442 Widow or widower $888 Young widow or widower with two children $1,904

Figure 12-4 Where Retirees Get Their Income

Payments for Time Not Worked Vacations Holidays Reporting time Personal excused absences Grievances and negotiations Sabbatical leaves

Examples of Employee Services (selected) Tuition aid Credit unions Food service Company car Career clothing Child care Elder care Gift matching Stock-purchase plans Christmas bonuses Social activities Referral awards Merchandise purchasing Transportation and parking

Costing Benefits Methods Annual cost of benefits for all employees Cost per employee per year Percentage of payroll Cents per hour

Figure 12-5 Distribution of Flexible Work Arrangements

Key Terms Discussed in This Chapter Doctrine of constructive receipt Antidiscrimination rule Contributory plans Noncontributory plans Yearly renewable term insurance Flexible benefits Workers’ compensation programs Long-term disability Disability management Managed health Direct contracting Managed care Gatekeeper HMO Point-of-service plan Pension Defined-benefit plan Defined-contribution plan Cash-balance plan

Key Terms (contd.) Grandfather clause Cost shifting Cafeteria benefits Flexible spending accounts