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Employee Benefits

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Chapter 13 of Human Resource Management: Gaining a Competitive Advantage

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Employee Benefits

  1. 1. Human Resource Management: Gaining a Competitive Advantage <ul><li>Chapter 13 </li></ul><ul><li>Employee Benefits </li></ul>Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
  2. 2. Learning Objectives <ul><li>Discuss growth and its reasons in benefits costs. </li></ul><ul><li>Explain provisions of employee benefits programs. </li></ul><ul><li>Compare U.S. and other countries’ employee benefits. </li></ul><ul><li>Describe effects of benefits management on cost and work-force quality. </li></ul><ul><li>Explain importance of effectively communicating nature and value of benefits to employees. </li></ul><ul><li>Describe regulatory constraints that affect the way employee benefits are designed and administered. </li></ul>13-
  3. 3. Introduction <ul><li>Average cost of benefits is about 37% for every payroll dollar. </li></ul><ul><ul><li>about 27% of total compensation package. </li></ul></ul><ul><li>Benefits are unique because: </li></ul><ul><ul><li>more regulation of benefits than direct pay. </li></ul></ul><ul><ul><li>almost obligatory for employers to provide. </li></ul></ul><ul><ul><li>complex for employees to understand. </li></ul></ul>13-
  4. 4. Reasons for Benefits Growth <ul><li>Laws mandating benefits passed during and after Great Depression </li></ul><ul><li>Wage and price controls instituted during WWII and labor shortages </li></ul><ul><li>Tax treatment of benefits programs </li></ul><ul><ul><li>M arginal tax rate is % of an additional dollar of earnings that goes to taxes </li></ul></ul><ul><li>Large groupV. individual insurance </li></ul><ul><li>Organized labor </li></ul><ul><li>Employer differentiation </li></ul>13-
  5. 5. Benefit Programs Social Insurance Private Group Insurance Family-Friendly Policies Retirement Pay For Time Not Worked 13-
  6. 6. Social Security <ul><li>Social Security provides old-age insurance, unemployment insurance, survivors' insurance, disability insurance, hospital insurance and supplementary medical insurance. </li></ul><ul><li>Social Security retirement benefits are free from federal tax and free from state tax in some states. </li></ul><ul><li>Full benefits begin at age 65 or a reduced benefit at 62 . </li></ul><ul><li>Both employers and employees are assessed payroll tax. </li></ul><ul><li>Eligibility age for benefits and tax penalty for earnings influence retirement decisions. </li></ul>13-
  7. 7. Unemployment Insurance <ul><li>4 Objectives of Unemployment Insurance: </li></ul><ul><ul><li>offset lost income during involuntary unemployment </li></ul></ul><ul><ul><li>help unemployed workers find new jobs </li></ul></ul><ul><ul><li>provide an incentive for employers to stabilize employment </li></ul></ul><ul><ul><li>preserve investments in worker skills by providing workers with income during short-term layoffs. </li></ul></ul><ul><ul><li>No state imposes the same tax on every employer. </li></ul></ul><ul><ul><li>Unemployed workers are eligible for benefits if they </li></ul></ul><ul><ul><li>have a prior attachment to the workforce </li></ul></ul><ul><ul><li>are available for work </li></ul></ul><ul><ul><li>are actively seeking work </li></ul></ul><ul><ul><li>were not discharged for cause, did not quit voluntarily and are not out of work because of a labor dispute. </li></ul></ul>13-
  8. 8. Workers’ Compensation <ul><li>Workers' compensation laws cover job-related injuries and death. </li></ul><ul><li>System is based on no-fault liability . </li></ul><ul><li>Covers 90 % of U.S. workers. </li></ul><ul><li>4 Categories of Benefits : </li></ul><ul><ul><li>disability income </li></ul></ul><ul><ul><li>medical care </li></ul></ul><ul><ul><li>death benefits </li></ul></ul><ul><ul><li>rehabilitative services. </li></ul></ul>13-
  9. 9. Private Group Insurance <ul><li>Offered at employer’s discretion ; plans not legally required. </li></ul><ul><li>2 major types: medical insurance and disability insurance. </li></ul><ul><ul><li>Medical insurance - most important benefit; most full-time employees get such benefits. </li></ul></ul><ul><ul><li>Disability insurance includes short-term and long-term plans. </li></ul></ul><ul><li>Group rates are lower because of economies of scale, ability </li></ul><ul><li>to pool risks and greater bargaining power of a group. </li></ul><ul><li>Consolidated Omnibus Budget Reconciliation Act (COBRA) requires employers to permit employees to extend health insurance coverage at group rates for up to 36months </li></ul><ul><li>following a qualifying event, such as termination. </li></ul>13-
  10. 10. Retirement Plans <ul><li>Defined Benefit </li></ul><ul><li>Guarantees a specified retirement benefit level to employees. </li></ul><ul><li>Insulates employees from investment risk, which is borne by the company. </li></ul><ul><li>PBGC guarantees basic retirement benefit in case of financial difficulties. </li></ul><ul><li>ERISA increased fiduciary responsibilities of pension plan trustees, established vesting rights and portability provisions and established PBGC. </li></ul><ul><li>Defined Contribution </li></ul><ul><li>Does not promise employees a specific benefit level upon retirement. </li></ul><ul><li>Employers shift investment risk to the employee. </li></ul><ul><li>No need to calculate payments based on age and service. </li></ul><ul><li>Most prevalent in small companies. </li></ul>13-
  11. 11. Types of Defined Contribution Plans Money Purchase Profit-sharing Employee Stock Ownership 13-
  12. 12. Cash Balance Plans <ul><li>An employer sets up an individual account for each employee and contributes a percentage of the employee’s salary. </li></ul><ul><li>The account earns % at a </li></ul><ul><li>predefined rate. </li></ul>13-
  13. 13. Funding, Communication and Vesting Requirements <ul><li>S ummary plan description (SPD) obligates employers to describe plan's funding, eligibility requirements, risks etc.. </li></ul><ul><li>ERISA guarantees that employees, after working a certain number of years, earn the right to a pension upon retirement, referred to as vesting rights . </li></ul><ul><li>Vesting schedules that may be used: </li></ul><ul><ul><li>Employees are vested after five years of service. </li></ul></ul><ul><ul><li>Employers may vest employees over a three- to seven-year period, with at lea st 20 % in the third year and each year thereafter. </li></ul></ul>13-
  14. 14. Pay for Time Not Worked <ul><li>Vacation: </li></ul><ul><li>Europe- 30 days of mandated vacation is common. </li></ul><ul><li>U. S .- no legal minimum; 10 days is common. </li></ul><ul><li>Sick Leave Programs: </li></ul><ul><li>provide full salary replacement for a limited period </li></ul><ul><li>of time, usually not exceeding 26 weeks. </li></ul><ul><li>amount based on length of service, accumulating with service. </li></ul>13-
  15. 15. Family-Friendly Policies <ul><li>To ease employees’ conflicts between work and non-work, organizations may use family-friendly policies such as family leave policies and child care. </li></ul><ul><li>Family and Medical Leave Act (FMLA) : </li></ul><ul><ul><li>applies to organizations with 50 or more employees within a 75-mile radius </li></ul></ul><ul><ul><li>applies to childbirth or adoption; care for a seriously ill child, spouse, or parent; or for an employee's own serious illness. </li></ul></ul><ul><ul><li>Employees are guaranteed the same or comparable job when they return to work. </li></ul></ul><ul><ul><li>Employees with less than a year of service or those who work less than 25 hours a week are not covered. </li></ul></ul>13-
  16. 16. Family-Friendly Policies <ul><li>Family and Medical Leave Act requires organizations with 50 or more employees within a 75-mile radius to provide as much as 12 weeks of unpaid leave after childbirth or adoption; to care for a seriously ill child, spouse, or parent; or for an employee’s own serious illness. </li></ul><ul><li>Child Care : </li></ul><ul><ul><li>Employers may provide some type of child care support to employees: </li></ul></ul><ul><ul><ul><li>supplies and helps employees collect information about child care, </li></ul></ul></ul><ul><ul><ul><li>vouchers or discounts for existing child care facilities or </li></ul></ul></ul><ul><ul><ul><li>child care facility at or near worksites. </li></ul></ul></ul>13-
  17. 17. Managing Benefits : Employer Objectives and Strategies <ul><li>Surveys and Benchmarking </li></ul><ul><ul><li>Company should know what competition is doing. </li></ul></ul><ul><ul><li>Surveys information is available from private consultants, Bureau of Labor Statistics (BLS) and Chamber of Commerce. </li></ul></ul><ul><li>Cost control </li></ul><ul><ul><li>Larger the benefit cost, greater the savings possibility. </li></ul></ul><ul><ul><li>Growth rate of may result in serious future costs. </li></ul></ul><ul><ul><li>Cost containment efforts work to extent that the employee has significant direction in choosing how much to spend in a benefit category. </li></ul></ul>13-
  18. 18. Healthcare: Controlling Costs and Improving Quality <ul><li>In U. S. spends more on health care than any other country </li></ul><ul><li>Health-care expenditures have risen from 5.3 % of GNP in 1960 to 15.3% today. </li></ul><ul><li>Cost control attempts – by employers such as managed care, fall into six major categories: </li></ul><ul><ul><li>plan design </li></ul></ul><ul><ul><li>use of alternative providers </li></ul></ul><ul><ul><li>use of alternative funding methods </li></ul></ul><ul><ul><li>claims review </li></ul></ul><ul><ul><li>education and prevention </li></ul></ul><ul><ul><li>external cost control systems </li></ul></ul><ul><li>Trend - to shift costs to employees through use of deductibles, coinsurance, exclusions and limitations and maximum benefits. </li></ul>13-
  19. 19. Healthcare: Controlling Costs and Improving Quality <ul><li>Health Maintenance Organizations (HMO) </li></ul><ul><li>focus on preventive care and outpatient treatment. </li></ul><ul><li>require employees to use only HMO services and provide benefits on a prepaid basis. </li></ul><ul><li>physicians and health-care workers paid a flat salary to reduce incentive of raising costs. </li></ul><ul><li>Preferred Provider Organizations (PPOs) </li></ul><ul><li>contract with employers and insurance companies to provide care at reduced fees. </li></ul><ul><li>do not provide benefits on a prepaid basis. </li></ul><ul><li>employees often are not required to use justPPOs. </li></ul><ul><li>less expensive than traditional health care but more expensive than HMOs. </li></ul>13-
  20. 20. Employee Wellness Programs <ul><li>Focus on changing behaviors on and off work time that could lead to future health problems. </li></ul><ul><li>2 Classes of EWP’s: </li></ul><ul><ul><li>Passive -use little or no outreach to individuals and provide no ongoing motivational support. </li></ul></ul><ul><ul><li>Active- assume that behavior change requires not only awareness and opportunity, but also support and reinforcement. </li></ul></ul><ul><li>3 Types of Employee Wellness Designs </li></ul><ul><ul><li>Health education </li></ul></ul><ul><ul><li>Physical fitness fitness facilities </li></ul></ul><ul><ul><li>Follow-up model </li></ul></ul>13-
  21. 21. 2 Phenomena in Cost Control Efforts 13-
  22. 22. Staffing Responses to Control Benefits Cost Growth <ul><li>Because benefit costs are fixed, benefits cost per hour can be reduced by having employees work more hours. </li></ul><ul><li>Classify employees as exempt , since they can reduce their benefit costs per hour without having to pay overtime. </li></ul><ul><li>Classify workers as independent contractors rather than employees, eliminating the employer's obligation to provide legally required benefits. </li></ul>13-
  23. 23. Nature of the Workplace <ul><li>Assessing employee benefits preferences is essential. </li></ul><ul><li>Use market research methods to assess employees’ preferences same way consumers’ demand for products and services are assessed. </li></ul><ul><li>Care must be taken not to raise employee expectations regarding future changes. </li></ul>13-
  24. 24. Communicating With Employees 13-
  25. 25. Flexible Spending Accounts <ul><li>Permit employees to choose types and amount of benefits. </li></ul><ul><li>Advantages include: </li></ul><ul><ul><li>employees more aware and appreciative of their benefits package </li></ul></ul><ul><ul><li>better match between package and employee's needs, which improves satisfaction and retention </li></ul></ul><ul><ul><li>cost reductions </li></ul></ul><ul><li>Disadvantages include: </li></ul><ul><ul><li>administrative cost </li></ul></ul><ul><ul><li>adverse selection </li></ul></ul>13-
  26. 26. Flexible Spending Accounts <ul><li>Permits pretax contributions to an employee account that can be drawn on to pay for uncovered health care expenses. </li></ul><ul><li>Funds must be spent during the year or they revert to the employer. </li></ul><ul><li>Major advantage -take-home pay increases. </li></ul>13-
  27. 27. General Regulatory Issues <ul><li>Benefit plans must meet nondiscrimination rules and qualified plans. </li></ul><ul><li>Sex, Age, and Disability : </li></ul><ul><ul><li>It is illegal for companies to require women to contribute more to a pension plan than men. </li></ul></ul><ul><ul><li>Employers cannot discriminate against employees over age 40 in pay or benefits. </li></ul></ul><ul><ul><li>Employees with disabilities have equal access to same health insurance coverage as other employees. </li></ul></ul><ul><li>Monitoring Future Benefits Obligations – Financial Accounting Statement (FAS) 106 -any benefits (excluding pensions) provided after retirement cannot be funded on a pay-as-you-go basis; must be paid on an accrual basis. </li></ul><ul><li>Need to balance interests of shareholders, current employees, and retirees. </li></ul>13-
  28. 28. Summary <ul><li>Organizations less paternalistic employee benefit strategies. </li></ul><ul><li>Employees have more responsibility and risk regarding benefits. </li></ul><ul><li>Employers have greater reliance on defined contribution plans. Such plans require employees to understand investing. </li></ul><ul><li>Risk to employees is greater when defined contribution plans invest a substantial portion of their assets in company stock. </li></ul><ul><li>If the company has financial problems, employees risk losing both their jobs and their retirement money. </li></ul><ul><li>Companies have reduced or eliminated benefits giving more responsibility to employees. </li></ul><ul><li>Employees are being asked to increase the proportion of costs that they pay and to use data on health care quality to make better choices about health care. </li></ul>13-
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Chapter 13 of Human Resource Management: Gaining a Competitive Advantage

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