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Risk Management and Insurance: Perspectives in a Global Economy 16. Personnel Risk Management Click Here to Add Professor and Course Information

Study Points  Employee benefits  Risk management for international employees 3

Employee Benefits 4

Some Observations  Employee benefits consisting of all forms of employer- provided compensation, exclusive of direct wages and salaries.  Complexity of designing and administering employee benefit plans for firms operating internationally  Popularity of voluntary employee benefit plans caused by Economic expansion Substantial growth in salaries, particularly for executives and managers  Importance of maintaining consistency of treatment among employees. 5

Employee Benefit Plans and Perquisites (Figure 16.1) 6 Perquisites Club membership Company-provided car Personal driver and servants Company-provided or subsidized housing Low rate or interest free loans Tax and financial planning service Common Types of Government-mandated Employee Benefit Plans Death benefits to widows/widowers and children Disability benefits Retirement benefits Occupational accident and sickness benefits Termination/severance allowances Unemployment benefits Family/child allowances Common Types of Voluntary (Private) Employee Benefit Plans Life insurance benefit Sick leave and other short-term disability income benefits Long-term disability income benefits Basic or supplemental medical expense benefits Basic or supplemental retirement benefits Payments for time not worked, including vacations Termination/severance benefits

Rationales for Employee Benefit Plans  Lifetime utility maximization Deferred wage theory  Meeting the competition  Improved employee productivity  Efficiency of the group mechanism Marketing efficiencies Administrative efficiencies Underwriting efficiencies  External pressures  Tax advantages 7

Designing Employee Benefit Plans 1.Total compensation (remuneration) approach 2.Defined benefit approach 3.Defined contribution approach 8

Total Compensation (Remuneration) Approach  Consists of all forms of compensations both Direct (base pay, bonuses, etc.) and Indirect (employee benefits and perquisites)  Recognizes tradeoffs between benefits and wages  Reflects overall firm objectives, competitive market forces, and the needs and desires of employees  The need for this approach takes on greater importance as benefit costs become a larger component of total compensation. 9

Defined Benefit (DB) vs. Defined Contribution (DC) DB  The employer determines the benefit amounts to be provided  All employees covered by the plan are provided with the same fixed or predetermined, set of benefits, irrespective of Differing ages Family composition and Overall needs DC  The employer contribution amounts rather than the benefits are fixed  Two examples Flexible benefit plan Cafeteria plan 10 Advantages and disadvantages – pages

International Variations 11

International Variations – Pension  Pensionable age also known as Normal pension age Normal retirement age Pension eligibility age  Gradual (phased) retirement  Types of plans DB retirement plans DC retirement plans Hybrid plans  Income replacement at retirement Figure 16.2  Cutbacks in government pension schemes 12

After-tax Replacement Ratios (Figure 16.2) 13

After-tax Income by Source (Figure 16.3) 14

International Variations – Healthcare  Benefits Basic healthcare benefits Supplemental healthcare benefits  Containing escalating healthcare plan costs  Managed care programs Preferred provider organization (PPO) Health maintenance organization (HMO)  Flexible benefit plans  Wellness programs 15 Table 16.2 for selected countries

International Variations – Group Life Insurance  It is used to fund employer-provided death benefits.  Death benefits frequently included in pension schemes  Employer contributions toward the cost of insurance not creating any income tax liability to employees Subject to limits  Insurance coverage expressed as A multiple of salary (e.g., 2 times annual base salary) A flat amount (e.g., $50,000) 16

Group Life Insurance (Table 16.3) 17

International Variations – Disability Benefits  Found less frequently than pension and life insurance benefits  Short-term benefit plans (e.g., 3~6 months) more common than long-term benefit plans  Benefits often tied with severance benefits or to government-provided disability benefits 18

Disability Plans (Table 16.4) 19

Special Issues Facing MNCs Total Compensation  Complexity caused by Differences in tax systems Diversity in local customs and cultures Varying living costs  Many firms move away from local-country compensation practices to designing pay structures that provide greater fairness for all employees concerned. Multinational Pooling  Participation in a global insurance arrangement to finance the costs of its worldwide benefit programs  Advantages Simpler administration and management of employee benefit plans Economies of scale and scope reduce the cost of insurance Favorable claims experience in some markets offset unfavorable in other markets An MNC may use a traditional or create its own captive. 20

Multinational Pooling (Figure 16.4) 21

Risk Management for International Employees 22

Definitions and Nature of the Concerned Risks  Kidnapping Abduction and detention of an individual to secure the payment of a ransom in exchange for the promised release of the victim Usually by unlawful force Sometimes by fraud  Terrorism  Extortion Use of force or intimidation to obtain money or other property from someone  Detention Temporary custody of an individual for lawful purposes 23 Chapter 6 also for terrorism

Management of Personnel  Carefully analyze risks and weigh them against potential rewards of a particular project  Fully inform employees of the hazards they face  Supply the wherewithal to enhance their safety Through training, technical means such as armored cars In some cases, even protective details  Plan the firm’s response in the event of an event 24

Crisis Management Plan  To ensure an efficient response to the event  Crisis management team comprising The ultimate decision-maker (e.g., CEO) The coordinator (CRO or security director) The corporate general counsel Even the best plans are useless if managers are unaware of their existence or of their particular roles and responsibilities in the event of a crisis. Insight 16.2 (Survival Guide)  Crisis management teams usually work with specialized security firms. 25

Kidnap, Ransom and Extortion Insurance  Direct payments  Consequential loss payments, for example: Rewards paid to informants Salaries of the victim and the replacement worker  Crisis assistance Hostage/extortion negotiation professional services arranged by the insurance company  Pricing and underwriting A function of exposure and insurance limits 26

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Discussion Questions 29

Discussion Question 1  How will changing employment patterns, changing demographics and movement to a global marketplace affect employee benefit plan design in your country in the future? Has the government in your country introduced new laws related to this issue? If not, is it considering such a measure in the near future? 30

Discussion Question 2  What are the primary factors that account for the cross- country differences in voluntary employer-sponsored benefit programs? 31

Discussion Question 3  What unique or special issues/problems do MNCs face in the provision of employee benefits? How are MNCs addressing these issues today? 32

Discussion Question 4  Why is it envisioned that employer-provided economic security will assume an increasing role in virtually all countries? 33

Discussion Question 5  Should we expect greater uniformity worldwide in the types of employee benefit programs offered and the way in which they are provided? Why or why not? 34

Discussion Question 6  Identify a large MNC in your home country and examine (a) the scope of employee benefits and (b) the approach (DB, DC or hybrid) it uses to offer the benefits. 35

Discussion Question 7  Briefly describe the structure of (a) healthcare programs and (b) employee retirement programs in your (your friend’s) country. 36

Discussion Question 8  Why do kidnap/ransom and extortion insurance policies prohibit the insured from disclosing the existence of the insurance? 37

Discussion Question 9  How do MNCs’ personnel risks differ from those of purely national corporations? 38