Employee Benefit and Services

Growth of Employee Benefits

Prof. Dr. Z. Alam
 The Value of Employee Benefits
Employee benefits, also known as perks or fringe
benefits, are provided to employees over and above
salaries and wages.
These employee benefit packages may include overtime,
medical insurance,
vacation, profit sharing
and
retirement benefits, to name just a few Employee
Benefits ?
• .” Fringe benefits are additional compensation
provided to an employee by an employer, such
as health insurance, paid time off, or a
company car.
• These additional on-the-job perks, typically
referred to as fringe benefits, are viewed as
compensation by an employer but are generally
not included in an employee’s taxable income.
 Benefits perks
• , profit sharing, health Insurance
Vacation/Paid Time Off Performance Bonuses
Paid Sick Days, 401(k), Retirement Plan and/or
Pension ,Flexible Schedule Office Perks
,Employee Development Programs ,Tuition
Reimbursement, Employee Discounts Gym
Membership or Wellness Programs Stock
Options and/or Equity A Diversity Program
 Why are employee benefits important?

• Offering benefits to your employees is important

because it shows them you are invested in not only
their overall health, but their future.
• An employee benefits package can help to attract and
retain talent.
• Benefits can help you differentiate your business from
competitors.
• Employee benefits can improve your company’s
bottom line by engaging employees to participate in
wellbeing programs, such as Virgin Pulse.
• Healthier employees mean reduced
healthcare costs for your organization.
Employees with fewer health risks experience
fewer sick days, fewer trips to the doctor, and
spend more time working in your
organization, bringing their best selves to work
every day.
• What is emploee benefits?
• Why are employee benefits?
Why the Growth in Employee Benefits?

• Wage and price control

• Unions
• Employer impetus
• Cost effectiveness of benefits
• Government impetus.
 Wage and Price Controls

• During both World War II and the Korean War,

the federal government instituted strict wage
and price controls. The compliance agency
charged with enforcing these controls was
relatively lenient in permitting reasonable
increases in benefits. This was the catalyst for
growth in pensions, health-care coverage,
time off, and the broad spectrum of benefits
virtually unthinkable before 1950.
 Unions

• The wage and price controls has created a

perfect opportunity for unions to flex the
muscles they had acquired under the Wagner
Act of 1935. With little freedom to raise wages
during the war, unions fought for the
introduction of new benefits and the
improvement of existing benefits. Success on
this front during the war years led to further
postwar demands.
 Employer Impetus

• Many of the benefits in existence today were

provided at employer initiative. Much of this
initiative can be traced to pragmatic concerns about
employee satisfaction and productivity. Savings and
profit sharing plans were implemented to improve
performance and provide increased security for
worker retirement . Many employer-initiated
benefits were designed to create a climate in which
employees perceived that management was
genuinely concerned for their welfare.
 Cost Effectiveness of Benefits

• Another important and sound impetus for the

growth of employee benefits is their cost
effectiveness in two situations. The first cost
advantage is that most employee benefits are not
taxable.
• A second cost-effectiveness component of benefits
arises because many group based benefits (e.g., life,
health, and legal insurance) can be obtained at a
lower rate than could be obtained by employees
acting on their own.
 Government Impetus

• Obviously the government has played an

important role in the growth of employee
benefits. Three employee benefits are
mandated by either the state or federal
government:
• workers’ compensation (state),
unemployment insurance (federal), and
social security (federal).
• In addition, most other employee benefits are
affected by such laws as the Employee
Retirement Income Security Act (ERISA), which
affects pension administration, and various
sections of the Internal Revenue Code( IRC)
.Most recently, the highly controversial Patient
Protection and Affordable Care Act signed into
law on March 23, 2010, by former President
Obama was appeal at the Supreme Court.
 Review
• Wage and price control
• Unions
• Employer impetus
• Cost effectiveness of benefits
• Government impetus.
 Administration Issues
• Four major administration issues arise in
setting up a benefit package
• Who should be protected or benefited ?
• How much choice should employees have
among an array of benefits ?
• How should benefits be financed ? And
• Are your benefits legally defensible?
• The first issue—who should be covered—
ought to be an easy question. The answer is
employees , of course. Every organization has
a variety of employees with different
employment statuses. Should these
individuals be treated equally with respect to
benefits coverage? Historically companies
have provided far fewer benefits for part-time
workers.
• As a second example, should retired
automobile executives be permitted to
continue purchasing cars at a discount price, a
benefit that could be reserved solely for
current employees? In fact, a series of
questions need to be answered: 1. What
probationary periods (for eligibility of
benefits) should be used for various types of
benefits?
• Is there a rationale for different probationary periods
with different benefits?
• 2. Which dependents of active employees should be
covered ?
• 3. Should retirees (as well as their spouses and perhaps
other dependents) be covered, and for which benefits?
• 4. Should survivors of deceased employees (and/or
retirees) be covered? If so, for which benefits? Are
benefits for surviving spouses appropriated? be
covered?
• 5. What coverage, if any, should be extended
to employees who are suffering from
disabilities?
• 6. What coverage, if any, should be extended
to employees during layoffs, leaves of
absence, strikes, and so forth?
• 7. Should coverage be limited to full-time
employees?
• The second administrative issue concerns
choice (flexibility) in plan coverage. In the
standard benefit package, employees typically
have not been offered a choice among
employee benefits. A flexible benefit program
are offering greater flexibility and choice. Such
plans might provide, for example, (1) optional
levels of group term life insurance; (2) the
availability of death or disability benefits
under pension or profit-sharing plans;
(3) choices of covering dependents under group
medical expense coverage; and
(4) a variety of participation, cash distribution,
and investment options under profit-sharing,
thrift, and capital accumulation plans.
 Advantages

• 1. Employees choose packages that best satisfy their unique

needs.
• 2. Flexible benefits help firms meet the changing needs of a
changing workforce.
• 3. Increased involvement of employees and families
improves understanding of benefits.
• 4. Flexible plans make introduction of new benefits less
costly. Any new option is added merely as one among a wide
variety of elements from which to choose.
• 5. Cost containment: Organization sets dollar maximum;
employee chooses within that constraint.
 Disadvantages

• 1. Employees make bad choices and find themselves

not covered for predictable emergencies.
• 2. Administrative burdens and expenses increase.
• 3. Adverse selection: Employees pick only benefits
they will use; the subsequent high benefit utilization
increases its cost.
• 4. Flexible benefit plans are subject to
nondiscrimination requirements in Section 125 of
the Internal Revenue Code.
• Another way to increase employee awareness, and
probably the biggest trend today in health care, is to
offer market-based, or customer-driven , health
care. Although there are many variants on
consumer-driven health care, here are the basic
choices:
• Full-Defined Contribution —The employee is
responsible for finding and purchasing individual
medical coverage. The employer provides funding
through either direct compensation or a voucher
• Tiered Networks —The employer offers
employees a choice of medical plans, which
include medical systems of varying costs.
• Menu-Driven —Employers provide online
information to help employees customize
their own benefit plan by selecting co-pays,
deductibles, and so forth.
• Each of the alternatives creates a motivation
for employees to think about what option fits
their budget and particular health
characteristics.
• The third administrative issue involves the
question of how to finance benefit plans.
Alternatives include:
• 1.Noncontributory (Employer pays total costs.)
• 2. Contributory (Costs are shared between
employer and employee.)
• 3. Employee financed (Employee pays total
costs for some benefits—by law the
organization must bear the cost for certain
benefits.)
• In general, organizations prefer to make
benefit options contributory, reasoning that a
“free good,” no matter how valuable, is less
valuable to an employee. Furthermore,
employees have no personal interest in
controlling the cost of a free good.
• Managed Competition —The employer
provides a subsidized basic medical plan with
buy-up options. Plans can be from the same or
multiple insurers.
• • Health Savings Accounts —A fund is created
by the employer, employee, or jointly that is
used to pay the first x dollars of health-care
expenses.
• The answers to these questions depend on the
policy decisions regarding adequacy,
competition, and cost effectiveness .
 Benefits Planning and Design Issues

• What do you want—or expect—the role of

benefits to be in your overall compensation
package . For example, if a major
compensation objective is to attract good
employees, we need to ask, “What is the best
way to achieve this? The answer is not always,
or even frequently, “Let’s add another
benefit.”
• Consider the situation as the benefits
manager. Recently, a casino opened up in the
Niagara Falls area. The Seneca Indians own
this casino, and they needed to fill thousands
of entry-level jobs. The wages for a blackjack
dealer were $4 per hour plus tips. The
combination of the two exceeds minimum
wage, but not by much..
• How do we attract more dealers, and other
applicants, given these low wages? One temptation
might be to set up a day care center to attract more
mothers of preschool children . A more prudent
compensation policy would ask the question: “Is day
care the most effective way to achieve my
compensation objective?” Sure, day care may be
popular with working mothers, but can the necessary
workers be attracted to the casino using some other
compensation tool that better meets needs?
• Surveys of this group indicate day care is an extremely
important factor in the decision to accept a job.”
• As a second example, how do we deal with undesirable
turnover? Rich Floersch, Sr. Vice President of HR at McDonald’s,
faced this very question. After looking at other alternatives to
reduce turnover, Rich decided that the best strategy was to
design a benefit package that improved progressively with
seniority, thus providing a reward for continuing service. Keep
in mind, though, Rich only made this decision after evaluating
the effectiveness of other compensation tools (e.g., increasing
wages, introducing incentive compensation).
• In addition to integrating benefits with other
compensation components, the planning
process also should include strategies for
ensuring external competitiveness and
adequacy of benefits . Competitiveness
requires an understanding of what other firms
in your product and labor markets offer as
benefits. Firms conduct benefit surveys much
as they conduct salary surveys.
 ,
• 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
• In addition to integrating benefits with other
compensation components, the planning
process also should include strategies for
ensuring external competitiveness and
adequacy of benefits. Competitiveness
requires an understanding of what other firms
in your product and labor markets offer as
benefits. Firms conduct benefit surveys much
as they conduct salary surveys.
• Most organizations evaluating adequacy
consider the financial liability of employees
with and without a particular benefit (e.g.,
employee medical expenses with and without
medical expense benefits). More organizations
need to consider whether employee benefits
are cost justified.
• 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
• How issues associated with flexibility should
benefits be financed?
– Noncontributory
– Contributory
– Employee financed
• Are your benefits legally defensible?
 Factors Influencing Choice of Benefit
Package,
• Employer Factors
• 1. Relationship to total compensation costs
• 2. Costs relative to benefits
• 3. Competitor offerings
• 4. Role of benefits in:
• Attraction
• Retention
• Motivation
• 5. Legal requirements
• Employee Factors
• 1. Equity: fairness historically and in
• relationship to what others receive
• 2. Personal needs as linked to:
• Age
• Sex
• Marital status
• Number of dependents
 Relationship to Total Compensation Costs

• A good compensation manager considers

employee benefit costs as part of a total
package of compensation costs. Frequently
employees think that just because an
employee benefit is attractive, the company
should provide it. A good compensation
manager thinks somewhat differently: “Is
there a better use for this money? Could we
put the money into some other
 compensation component and achieve better
results?” Benefit costs are only one part of a
total compensation package.
Costs Relative to Benefits
• To control spiraling benefit costs, administrators
should adopt a broader, cost-centered approach.
As a first step, this approach would require policy
decisions on the level of benefit expenditures
acceptable both in the short and the long runs.
• Historically, benefit managers negotiated or
provided benefits on a package basis rather
than a cost basis. The current cost of a benefit
would be identified, and if the cost seemed
reasonable, the benefit would be provided for
or negotiated with employees.
• A cost-centered approach would require that
benefit administrators
• , in cooperation with insurance carriers and
armed with published forecasts of anticipated
costs for particular benefits, determine the cost
commitments for the existing benefit package.
Factors affecting this decision include an
evaluation of benefits offered by other firms and
the competitiveness of the existing package.
Also important is compliance with various legal
requirements as they change over time .
• Finally, the actual benefit of a new option must be
explored in relation to employee preferences. The
benefits that top the list of employee preferences
should be evaluated in relation to current and future
costs.
• In the negotiation process, then, employees or
union representatives can evaluate their preference
for the option against the forecasted cost burden. In
effect, this approach defines in advance the
contribution an employer is willing to make.
 Competitor Offerings

• Benefits must be externally equitable, too.

This begs the question, what is the absolute
level of benefit payments relative to important
product and labor market competitors?
Role of Benefits in Attraction, Retention, and
Motivation
 Administering the Benefits Program
Three Administrative Issues

• Communicating about the benefits

program
• Claims processing
• Cost containment
 Employee Benefit Communication

• Benefits communications revolves around four

issues: What is communicated,
• to whom,
• how it’s communicated, and
• how frequently.
• The most frequent method for
communicating employee benefits today is
probably still the employee benefit handbook.
• A typical handbook contains a description of
all benefits, including levels of coverage and
eligibility requirements.
• Second, an effective communications package
should match the message with the
appropriate medium . Technological advances
have made tremendous improvements in
employee benefit communication.
• Benefit administration over the Internet is also
growing at a rapidly. Employers are
increasingly posting their employee benefit
handbook components on their intranets or of
their web site.
 Claims Processing

• As noted by one expert, claims processing

arises when an employee asserts that a
specific event (e.g., disability, hospitalization,
unemployment) has occurred and demands
that the employer fulfill a promise of
payment. A claims processor must first
determine whether the act has, in fact,
occurred.
• If the event did occur, the second step involves
determining if the employee is eligible for the
benefit. If payment is not denied at this stage,
the claims processor calculates the payment
level.
 Cost Containment

• Increasingly, employers are auditing their

benefit options for cost containment
opportunities. The most prevalent practices
include:
• Probationary periods—excluding new
employees from benefit coverage until some
term of employment (e.g., three months) is
completed.
• 2. Benefit limitations—it is not uncommon to limit
disability income payments to some maximum
percentage of income and to limit medical/dental
coverage for specific procedures to a certain fixed
amount.
• 3. Co-pay—requiring that employees pay a fixed or
percentage amount for coverage.
• 4. Administrative cost containment—controlling
costs through policies such as seeking competitive
bids for program delivery.
• Probably the biggest cost-containment
strategy in recent years is the movement to
outsourcing. Outsourcing is also known as
Business Process Outsourcing (BPO). This is
the process of hiring another individual or
company, either domestically or
internationally, to handle business activities
for you.
 Communicating the Benefits Program

• Three elements of effective communications

– Company must spell out its benefit objectives and
ensure communications achieve the objectives
– Match the message with the appropriate medium
• Use of intranet – an internal organizational online Web
through which all forms of communication within the
organization can be streamlined
• Streamlined call center operation
– Content of communications package must be
complete, clear, and free of complex jargon
• Methods of communication
– Employee handbook
– Personalized benefit statements
– Meetings with employees
– Multi-media presentations
– Intranet
– Streamlined call center operation
 Claims Processing
• Claims processor must:
– Determine whether the act has, in fact, occurred
– Determine if the employee is eligible for the
benefit
– Calculate the payment level
 Cost Containment
Prevalent Practices

• Probationary periods
• Benefits limitations
• Co-pay
• Administrative cost containment