Milkovich/Newman: Compensation, Ninth Edition

Chapter 12
The Benefits
Determination
Process

McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
What Are Employee Benefits?

That part of the total compensation

package, other than pay for time
worked, provided to employees in
whole or in part by employer
payments, e.g. life insurance,
pension, workers’ compensation,
vacation, holidays…

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Exhibit 12.1: Changes in Benefit Costs
Over Time

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 Benefit Costs
 U.S. Chamber of Commerce reports benefit costs averaged 39% of
payroll in 2001
 Typical payroll dollar:
– 61.0 cents in wages
– 11.0 cents in medical benefits ($5,415/Ee)
– 10.9 cents in time not worked
– 8.2 cents in legally required payments
– 8.0 cents in retirement and savings contributions
– 1.0 cent in other costs

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 Benefit Costs
 In 2001:
Er size $/Ee on Benefits
<100 13,064
100-499 16,207
500-999 19,991
1,000-2,499 18,910
2,500+ 18,308

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 Health Care Costs and Firm Competitiveness
 In 2004, health-care spending amounted to over $1,500 for every
vehicle GM produced in U.S. (Chrysler, $1,400; Ford, $1,100)
– American workers on average pay ~32% of their health costs, GM salaried
ees ~27%, UAW members ~7%
– Current ees and families account for 1/3 of total health bill, retirees the
remainder
 Competition prevents passing on cost to customers
– Japanese competitors have younger workforces with lower costs
 As of 2003, Big Three had 524,000 hourly retirees, Toyota 49 (258 as of 2006)
 Expense impacts bottom-line and investment in R&D
– See also “As Benefits for Veterans Climb, Military Spending Feels Squeeze,” Wall Street
Journal, 1/25/05

 Adding prescription drug benefit to Medicare will save automakers

millions
– Companies lobbied for legislation that would cover all over 65, even those with retiree
health coverage thru Er
– GM spends $924 million annually on prescription drugs for retirees, including those
under age 65, Ford spends $300 million
 Source: Fortune, 9/29/03; Wall Street Journal, 4/7/05, 4/15/05; New York Times, 5/19/06 12-6
Why the Growth in Employee Benefits?

Wage and Employer

Price Impetus
Controls
Cost
Effectiveness of
Benefits

Unions Government
Impetus

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 Value of Employee Benefits
 Employees:
– Expect benefits as part of their total compensation
– Do not understand true value of benefits
– Often undervalue their benefits
– Often take benefits for granted
– Often cannot list all benefits received
– Have preferences regarding types of benefits they
want

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Exhibit 12.2: Ranking of Employee
Benefits

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Key Issues in Benefit Planning, Design,
and Administration
 Benefits Planning and Design Issues
– How to attract good employees
– How to deal with undesirable turnover
– Integrating benefits with other compensation
components
– Strategies for ensuring external competitiveness
– Ensuring that benefits are adequate
– Whether employee benefits are cost justified

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 Benefit Administration Issues
 Who should be protected or benefited?
– Series of questions need to be addressed
 How much choice should employees have
among an array of benefits?
– Concerns choice (flexibility) in plan coverage
– Standard benefit package
– Cafeteria-style,” or flexible, benefit plans

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 Benefit Administration Issues (cont.)
 How should benefits be financed?
– Noncontributory
– Contributory
– Employee financed
 Are your benefits legally defensible?

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Exhibit 12.3: Contingent Worker Benefits
Compared to Full-Time Workers

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Exhibit 12.4: Possible Options in a
Flexible Benefit Package

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 Exhibit 12.5: Advantages of Flexible
Benefits
 Employees choose packages that best satisfy their
unique needs.
 Flexible benefits help firms meet the changing
needs of a changing workforce.
 Increased involvement of employees and families
improves understanding of benefits.
 Flexible plans make introduction of new benefits
less costly.
 Cost containment: Organization sets dollar
maximum; employee chooses within the constraint.

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Exhibit 12.5: Disadvantages of Flexible
Benefits
 Employees make bad choices and find themselves
not covered for predictable emergencies.
 Administrative burdens and expenses increase.
 Adverse selection: Employees pick only benefits
they will use; the subsequent high benefit
utilization increases its cost.
 Subject to non-discrimination requirements in
Section 125 of the Internal Revenue Code.

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Financing Benefits Plans: Alternatives
 Non-contributory
– Employer pays total costs
 Contributory
– Costs shared between employer and employee
 Employee financed
– Employee pays total costs for some benefits
– By law the organization must bear the cost for some
benefits

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Exhibit 12.6: Factors Influencing Choice of
Benefit Package

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Exhibit 12.7: Impact of Legislation
on Selected Benefits

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 Administering the Benefits Program
Three Administrative Issues

Communicating about the benefits

1 program

2 Claims processing

3 Cost containment

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 Communicating Employee Benefits
Methods of communication
– Employee handbook
– Personalized benefit statements
– Meetings with employees
– Multi-media presentations
– Intranet
– Streamlined call center operation

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Exhibit 12.12: Basic Primer of Cost
Containment Terminology

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 Trends Related to Cost Containment
 Probationary periods

 Benefit limitations

 Copay

 Significant movement to outsourcing

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