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

3. 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?

4. 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?

5. 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?

6. 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.

7. 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

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

9. 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

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

11. 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

12. 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

13. 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

14. 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)

15. 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

16. 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

17. 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.

18. 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.”

19. 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

20. Figure 12-4 Where Retirees Get Their Income

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

22. 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

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

24. Figure 12-5 Distribution of Flexible Work Arrangements

25. 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

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