Fall 2008 Version Professor Dan C. Jones FINA 4355 Homework

Risk Management and Insurance: Perspectives in a Global Economy 16. Personnel Risk Management Professor Dan C. Jones FINA 4355 Homework

3 Study Points Employee benefits Risk management for international employees

Employee Benefits

5 Some Observations Employee benefits consist of all forms of employer-provided compensation, exclusive of direct wages and salaries. Expansion of a firm’s operations internationally adds to the complexity of designing and administering employee benefit plans. Economic expansion and the substantial growth in salaries, particularly for executives and managers, have contributed to the increasing popularity of voluntary employee benefit plans in many countries. Firms should strive to ensure consistency of treatment among employees.

6 Employee Benefit Plans and Perquisites (Figure 16.1) 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

7 Rationales for Employee Benefit Plans Lifetime utility maximization Deferred wage theory Meeting the competition Improved employee productivity

8 Rationales for Employee Benefit Plans Efficiency of the group mechanism Marketing efficiencies Administrative efficiencies Underwriting efficiencies External pressures Tax advantages

9 Designing Employee Benefit Plans Total compensation (remuneration) approach Consists of all forms of direct (base pay, bonuses, etc.) and indirect (employee benefits and perquisites) compensation provided by the employer Recognizes the importance of employee benefits in the total compensation and the existence of distinct tradeoffs between benefits and wages Reflect overall firm objectives, competitive market forces, and the needs and desires of employees The need for a total compensation approach to wage and benefit design takes on greater importance as benefit costs escalate, becoming a larger component of total compensation.

10 Defined Benefit (DB) vs. Defined Contribution (DC) Defined benefit plan The employer determines the benefit amounts to be provided Generally, 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. Defined contribution plan The employer contribution amounts rather than the benefits are fixed Two examples Flexible benefit plan Cafeteria plan Advantages and disadvantages – pages

11 International Variations – Pension Pensionable age Also known as normal pension age, normal retirement age and 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 Refer to Chapter 9 as well! Table 16.1 for selected countries

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 Table 16.2 for selected countries

15 International Variations – Group Life Insurance To fund employer-provided death benefits in many countries Death benefits frequently are included in pension schemes Employer contributions toward the cost of group life insurance often do not create any income tax liability to employees, within limits. Insurance coverage limits generally are expressed either as a multiple of salary or a flat amount. Table 16.3

16 Group Life Insurance (Table 16.3)

17 International Variations – Disability Found less frequently than pension and life insurance benefits Plans providing short-term benefits (e.g., 3~6 months) are more common than long-term benefit plans Benefits often tied with severance benefits or to government- provided disability benefits Table 16.4

18 Disability Plans (Table 16.4)

19 Special Issues Facing MNCs Total compensation Differing tax systems, local customs and cultures, and varying living costs, collectively, argue for varying levels of total compensation and, of equal or greater significance, differing packages of wages, benefits and perquisites. Many firms move away from local-country compensation practices to designing pay structures that provide greater fairness for all employees concerned.

20 Special Issues Facing MNCs Multinational pooling Participation in a global insurance arrangement to finance the costs of its worldwide benefit programs Advantages Total insurance costs are reduced through economies of scale and scope generated from the worldwide aggregation of all insured employees and all benefit plans. Favorable claims experience in some local markets can be used to offset unfavorable claims experience in other markets. The administration and management of employee benefit plans are made simpler. Excessive margins inherent in cartel and tariff-premium markets can be overcome through the international dividend calculation. An MNC may use a traditional or create its own captive.

21 Multinational Pooling (Figure 16.4)

RM for International Employees

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

24 Risk Management Carefully analyzing risks and weighing them against potential rewards of a particular project Fully informing employees of the hazards they face Supplying the wherewithal to enhance their safety – through training, technical means such as armored cars and, in some cases, even protective details Planning the company’s response in the event of an event

25 Crisis Management Plan The key is to ensure an efficient response to the event. Crisis management team comprising The ultimate decision-maker, such as the CEO The coordinator, such as the risk manager 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 in tandem with specialized security firms.

26 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

Discussion Questions

28 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?

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

30 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?

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

32 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?

33 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.

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

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

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