HR 202 Chapter 12

1. Compensation
Chapter 12
The Benefit Determination Process
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Benefits Mix
A first-class benefit plan
includes a mix of these
benefits.
Education reimbursement.
On-site child care services.
Car cleaning.
Financial counseling.
Concierge services.
Retirement benefits.
Now consider the extra
benefits at Google.
12 weeks paid leave for new
parents – either gender.
$500 in “Baby Bonding Bucks.”
Liberal policies for
volunteering.
On-site fitness centers and
medical care.
Lavish paid daily lunches.
College tuition reimbursement.

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Benefit Determination Process
Companies do not know if even ordinary benefits have positive
payoffs.
• Employees rate benefits a key factor in job satisfaction.
• Yet, less than half are satisfied with their benefits.
• There is a mismatch between cost to employer and perceived value to
employee.
Employee benefits can no longer be called “fringe benefits” but
the cost has risen over time.
• The average costs of benefits accounts for 30% of total compensation.
• Benefits add 44 cents to every dollar of wages and salaries.

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Exhibit 12.1: Total Hourly Compensation and
Benefits Costs, U.S. Private Industry, by
Establishment Size
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Exhibit 12.2: Cost of Employer Benefits Over
Time

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Why the Growth in Employee Benefits Costs?
Wage and Price Controls.
• In WW II and the Korean War.
Unions.
• Began negotiating for benefits.
• Several common benefits
arose with unions.
Employer Impetus.
• Traced to concerns over
satisfaction and productivity.
• Without data about payoffs,
benefits became a costly
entitlement.
Cost Effectiveness of Benefits.
• Most benefits are not taxable.
• Group-based plans may be
had at a much lower rate.
Government Impetus.
• Worker’s compensation.
• Unemployment insurance.
• Social security.
• Also laws such as the
Employee Retirement
Income Security Act (ERISA)
and various IRS codes.

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Exhibit 12.3: Example of Marginal Tax Rates for
an Employee Salary of $80,000

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The Value of Employee Benefits
Employees consistently rank medical benefits as the most
important benefit.
A major concern is evidence that employees frequently
undervalue the benefits provided.
The perceived value of benefits rises when employers introduce
choice through flexible benefit packages.
Employers have to plan and design effective benefit programs.
• They also need to communicate their value to employees.

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Exhibit 12.4: Ranking of Employee Benefits

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Benefits Planning and Design Issues
Employers must decide the role of benefits in their overall
compensation package.
Planning should include strategies for ensuring external
competitiveness and adequacy of benefits.
• Firms conduct benefit surveys of competitors.
• Ensuring benefits are adequate is a bit more difficult.
• There is no magic formula.
• The answer may lie in the relationship between adequacy and cost of
effectiveness.
• Employers are shifting increased benefit costs to employees through
higher deductibles and co-pays.

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Benefit Administration Issues
Who should be protected or benefited?
• Probationary periods, dependents, retirees, survivors, workers with
disabilities, and even layoffs offer challenges.
How much choice should employees have?
• One extreme designs a benefits package for the average employee.
• The other extreme is flexible benefit plans.
• Flexible plans increase employee recognition of benefit value.
• Companies may offer market-based, or customer-driven health care.
• Basic issues of consumer-driven health care.
• The employee pays a high deductible and coinsurance.
• The inducement is for the employee to shop around for the lowest rate.
How should benefits be financed?

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Exhibit 12.5: Possible Options in a Flexible
Benefit Package

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Benefit Administration – Financing and Legal Issues
How should benefits be financed?
• Noncontributory – employer pays total costs.
• Contributory – costs are shared between employer and employee.
• Employee financed – employee pays total costs for some benefits.
Are the benefits legally defensible?
• Benefits have to comply with hundreds of arcane sections of the tax
code among other things.
• Benefit administrators may develop compliance checklists and conduct
audits to ensure compliance with new and existing requirements.

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Components of a Benefit Plan – Employer Factors
Relationship to Total Compensation Costs.
• Benefit costs are only one part of a total compensation package.
Costs Relative to Benefits.
• Adopt a broad, cost-centered approach.
Competitor Offerings.
• Determine external equity with a benefits survey.
Role of Benefits in Attraction, Retention, and Motivation.
• Benefit schedules favor longer-term employees.
• For benefits to matter, they must meet employee needs.
Legal Requirements.
Absolute and Relative Compensation Costs

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Exhibit 12.7: Factors Influencing Choice of
Benefit Package

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Components of a Benefit Plan – Employee Factors
Equity.
• Perceived fairness must be considered in determining employee needs
– even if the perceived unfairness in not rational.
• Beware the “bandwagon” effect of offering benefits to avoid hard
feelings.
Personal Needs of Employees.
• One way to gauge preferences is to look at demographic differences.
• Studies have revealed universal preference trends.
• Employers may survey individuals about their needs.
• Employers may offer a flexible benefit plan, or cafeteria-style plan.
• Theoretically, this is ideal as employees identify benefits of greatest value
to them and benefit managers are able to control costs.

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Administering the Program: Communication
Benefits communication revolves around four issues.
• What is communicated.
• To whom.
• How it is communicate.
• And how frequently.
Efforts focus on identifying methods (how) of communication.
• The employee benefit handbook.
Effective communication should match the message with the
appropriate medium.
Failure to understand benefit components and their value is one
of the root causes of employee dissatisfaction with benefits.

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Exhibit 12.12: Employees Happy with Their
Benefits versus Employees Happy with
Communication about Their Benefits

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Administering the Program: Claims Processing
Claims processing arises when an employee asserts a specific
event occurred and demand the employer fulfill a promise.
A claims processor determines if the even actually occurred.
• If the event occurred, the next step is determining eligibility.
• If payment is not denied, the claims processor calculates payment.
• It is important to coordinate benefits.
• If multiple insurance companies are liable, a good processor can save
10-15% of a claim’s cost by ensuring joint payment.

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Administering the Program: Cost Containment
Employers audit their benefit options for cost containment
opportunities.
• Probationary periods.
• Benefit limitations.
• Co-pay.
• Administrative cost containment.
• Deny service on pre-existing conditions.
• Negotiate lower fees by providers.
• Develop programs that encourage wellness.
• Outsource benefits and administration.
• Self-insure.
• Provide accommodations for employees returning to work after an
illness or disability.

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Exhibit 12.13: Basic Primer of Cost Containment
Terminology
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End of Chapter 12.