t e n t h e d i t i o n
Gary Dessler
Chapter 13
Part 4 Compensation
Benefits and Services
After studying this chapter,
you should be able to:
Name and define each of the main pay for time not worked benefits.
Describe each of the main insurance benefits.
Discuss the main retirement benefits.
Outline the main employees’ services benefits.
Explain the main flexible benefit programs.
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Benefits
Benefits
Indirect financial and nonfinancial payments employees receive for continuing their employment with the company.
Types of employee benefit plans
Supplemental pay: sick leave and vacation pay
Insurance: workers’ compensation
Retirement: Pensions
Employee services: child-care facilities
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The Benefits Picture Today
Most full-time employees in the United States receive benefits.
Virtually all employers—99%—offer some health insurance coverage.
Benefits are a major expense (about one-third of wages and salaries) for employers.
Employees do seem to understand the value of health benefits.
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Annual Health Care Cost Increases
Figure 13–1
Source: Eric Parmenter, “Controlling Health-Care Costs,”
Compensation and Benefits Review, September/ October 2002, p. 44
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Private-Sector Employer
Compensation Costs, June 2003
Figure 13–2
Source: “Total Employer Costs Rose to in Second Quarter,”
BNA Bulletin to Management, September 11, 2003, p. 293
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Laws Affecting Employee Benefits
Retirement plans
Employee Retirement Income Security Act of 1975 (ERISA)
Economic Growth and Tax Relief Conciliation Act of 2000
Job Creation and Worker Assistance Act
Health plans
The Newborn Mother’s Protection Act of 1996
The Mental Health Parity Act of 1996
Age Discrimination in Employment Act
Health Insurance Portability and Accountability Act of 1996 (HIPAA)
Family and Medical Leave Act (FMLA)
Americans with Disabilities Act (ADA)
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Types of Employee Benefits
Pay for time not worked
Insurance benefits
Retirement benefits
Services
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Issues in Developing Benefits Plans
Benefits to be offered.
Coverage of retirees in the plan
Denial of benefits to employees during initial “probationary” periods
Financing of benefits.
Benefit choices to give employees.
Cost containment procedures to use.
Communicating benefits options to employees.
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Legally Required or Regulated Benefits
Table 13–1
* While not required under federal law, all these benefits are regulated in some way by federal law, as explained in this chapter.
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Pay for Time Not Worked
Unemployment insurance
Provides for benefits if a person is unable to work through no fault of his or her own.
Payroll tax on employers that is determined by an employer’s rate of personnel terminations.
Tax is collected and administered by the state.
Vacations and holidays
Number of paid vacation days varies by employer.
Number of holidays varies by employer.
Premium pay for work on holidays.
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Pay for Time Not Worked (cont’d)
Sick leave
Provides pay to an employee when he or she is out of work because of illness.
Costs for misuse of sick leave
Pooled paid leave plans
Parental leave
The Family Medical Leave Act of 1993 (FMLA)
Up to 12 weeks of unpaid leave within a one-year period
Employees must take unused paid leave first.
Employees on leave retain their health benefits.
Employees have the right to return to their job or equivalent position.
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North Carolina State University Family Illness Leave Request
Figure 13–3
Source: Used with permission.
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Pay for Time Not Worked (cont’d)
Severance pay
A one-time payment when terminating an employee.
Reasons for granting severance pay:
Acts as a humanitarian gesture and good public relations.
Mirrors employee’s two week quit notice.
Avoids litigation from disgruntled former employees.
Meets Worker Adjustment and Retraining Notification (“plant closing”) Act requirements.
Reassures employees who stay on after the employer downsizes its workforce of employer’s good intentions.
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Pay for Time Not Worked (cont’d)
Supplemental unemployment benefits (SUB)
Payments that supplement the laid-off or furloughed employee’s unemployment compensation.
The employer makes contributions to a reserve fund from which SUB payments are made to employees for the time the employee is out of work due to layoffs, reduced workweeks, or relocations.
SUB payments are considered previously earned compensation for unemployment calculation purposes.
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Insurance Benefits
Workers’ compensation
Provides income and medical benefits to work-related accident victims or their dependents, regardless of fault.
Death or disability: a cash benefit based on earnings per week of employment.
Specific loss injuries: statutory list of losses
Controlling worker compensation costs
Screen out accident-prone workers.
Make the workplace safer.
Thoroughly investigate accident claims.
Use case management to return injured employees to work as soon as possible.
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Insurance Benefits (cont’d)
Hospitalization, health, and disability insurance
Provide for loss of income protection and group-rate coverage of basic and major medical expenses for off-the-job accidents and illnesses.
Accidental death and dismemberment
Disability insurance
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Percent of Employers Offering Health Benefits
Table 13–3
Source: Adapted from SHRM/SHRM Foundation 2003 Benefits Survey.
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Insurance Benefits (cont’d)
Health maintenance organization (HMO)
A medical organization consisting of specialists operating out of a community-based health care center.
Provides routine medical services to employees who pay a nominal fee.
Receives a fixed annual contract fee per employee from the employer (or employer and employee), regardless of whether it provides that person with service.
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Insurance Benefits (cont’d)
Preferred provider organizations (PPOs)
Groups of health care providers that contract to provide medical care services at reduced fees.
Employees can select from a list of preferred individual health providers.
Preferred providers agree to discount services and to submit to certain utilization controls, such as on the number of diagnostic tests they can order.
Employees using non-PPO-listed providers may pay all of the service costs or the portion of the costs above the reduced fee structure for services.
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Other Cost-Saving Strategies
Wellness programs
Disease management
Absence management
On-site primary care
Eliminating cost-inefficient plans
Moving toward PPO
Figure 13–4
Source: Shari Caudron, “Health Care Costs: HR’s Crisis Has Real Solutions,” Workforce, February 2002, p. 30.
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Insurance Benefits (cont’d)
New trends in health care cost control:
Use of cost-containment specialists
Getting employees more involved and empowered
Automating health care plan administration
Online selection software
Using defined contribution health care plans
Outsourcing health care benefits administration
Reducing or eliminating retiree health care coverage
Joining benefits purchasing alliances
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Insurance Benefits (cont’d)
Other insurance issues
Mental health benefits and the Mental Health Parity Act of 1996
The Pregnancy Discrimination Act
COBRA requirements
Long-term care
Group life insurance
Provision of benefits for part-time and contingent workers
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Retirement Benefits
Social Security (Federal Old Age and Survivor’s Insurance)
A federal payroll tax (%) paid by both the employee and the employer on the employee’s wages
Retirement benefits at the age of 62
Survivor’s or death benefits paid to the employee’s dependents
Disability payments to disabled employees and their dependents.
The Medicare program
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Retirement Benefits (cont’d)
Types of pension plans
Contributory: employees contribute to the plan.
Noncontributory plans: employer makes all contributions to the plan.
Qualified plans: plans that meet requirements for tax benefits for employer contributions.
Nonqualified plans: plans not meeting requirements for favorable tax treatment.
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Retirement Benefits (cont’d)
Types of pension plans (cont’d)
Defined contribution: contributions of employees and employers are specified; plan payouts are not.
Defined benefit plans: plan payouts are specified; however, contributions must be sufficient to insure payouts.
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Retirement Benefits (cont’d)
401(k) Plans
Defined contribution plans based on section 401(k) of the Internal Revenue Code.
Plans are funded by pretax payroll deductions.
Contributions are invested in mutual stock funds and bond funds.
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) raised limits on employee contributions.
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Retirement Benefits (cont’d)
Other types of defined contribution plans
Savings and thrift plans
Employees contribute a portion of their earnings to a fund; the employer usually matches this contribution in whole or in part.
Deferred profit-sharing plans
Employers contribute a portion of profits to the pension fund, regardless of the level of employee contribution.
Employee stock ownership plans (ESOPs)
Qualified, tax-deductible stock bonus plans in which employers contribute company stock to a trust for eventual use by employees.
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Retirement Benefits (cont’d)
Employee Retirement Income Security Act (ERISA) of 1974
Restricts what companies must do in regard to pension plans. In unionized companies, the union can participate in pension plan administration.
Pension Benefits Guarantee Corporation (PBGC)
Insures pensions of a qualified plan that terminates without sufficient funds to its meet obligations.
Guarantees only defined benefit plans, not defined contribution plans.
Will only pay an individual a pension of up to about $27,000 per year.
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Retirement Benefits (cont’d)
Employees’ vesting rights under ERISA
Participants have a right to 100% of accrued benefits after five years of service.
Employers may phase in vesting over a period of three to seven years.
An employer can require that an employee complete a period of two years’ service before becoming eligible to participate in the plan.
If an employer requires more than one year of service before eligibility, the plan must grant employees full and immediate vesting rights at the end of that period.
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Retirement Benefits (cont’d)
Key policy issues in pension planning
Membership requirements
Setting the minimum age or minimum service at which employees become eligible for a pension.
Benefit formula
Determining pension payouts for individual employees.
Plan funding
Funding the plan (contributory or noncontributory).
Vesting
Meeting ERISA requirements for employer and employee contributions that cannot be forfeited for any reason by the vested employee.
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Retirement Benefits (cont’d)
Pension alternatives
Early retirement windows
Specific employees (often age 50-plus) are offered the opportunity to voluntarily retire earlier than usual.
The financial incentive is generally a combination of improved or liberalized pension benefits plus a cash payment.
Older Workers’ Benefit Protection Act (OWBPA)
Imposes limitations on waivers that purport to release a terminating employee’s potential claims against the employer based on age discrimination.
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Retirement Benefits (cont’d)
Pension alternatives (cont’d)
Increasing portability
Defined benefit plans to defined contribution plans
Allows workers who leave the firm before retirement to receive initial benefits at a younger age.
Cash balance pension plans
Defined benefit plan in which the employer contributes a percentage of employees’ pay to the plan every year, and employees earn interest on this amount.
Provide the portability of defined contribution plans with the employer funding of defined benefit plans.
Conversion to cash balance plans can have a disparate impact on older workers nearing retirement.
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Personal Services
Credit unions
Separate businesses established with the employer’s assistance to help employees with their borrowing and saving needs.
Employee assistance programs (EAPs)
Provide counseling and advisory services:
Personal legal and financial services
Child and elder care referrals
Adoption assistance
Mental health counseling
Life event planning
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Employee Assistance Programs
Key steps for launching a successful EAP program include:
Develop a policy statement.
Ensure professional staffing.
Maintain confidential record-keeping systems.
Be aware of legal issues.
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Family-Friendly Benefits
On-site or subsidized child care
Elder care
Fitness and medical facilities
Food services
Flexible work scheduling
Telecommuting
Educational subsidies
Sabbaticals
Loan programs for home office equipment
Stock options
Concierge services
Trauma counseling
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Executive Perquisites
Management loans
Golden parachutes
Financial counseling
Relocation benefits
Sabbaticals
Severance pay
Outplacement assistance
Company cars
Chauffeured limousines
Security systems
Company planes and yachts
Executive dining rooms
Physical fitness programs
Legal services
Tax assistance
Expense accounts
Club memberships
Season tickets
Credit cards
Children’s education
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Flexible Benefits Programs
The cafeteria (flexible benefits) approach
Each employee is given a benefits fund budget to spend on the benefits he or she prefers.
The fund limits the total cost for each benefits package.
Core plus option plans establish a core set of benefits which are mandatory for all employees.
Flexible spending accounts
Enable employees to pay for medical and other expenses with pretax dollars by depositing funds in their accounts from payroll deductions.
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Figure 13–6
HR Scorecard for Hotel Paris International Corporation*
Note: *(An abbreviated example showing selected HR practices and outcomes aimed at implementing the competitive strategy, “To use superior guest services to differentiate the Hotel Paris properties and thus increase the length of stays and the return rate of guests and thus boost revenues and profitability”)
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Sample Survey of Employee Needs
Source: Michelle Buckley, “Checkup for Health Benefit Offerings,” Compensation and Benefits Review, September/October 2000, p. 43.
Figure 13–7
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Flexible Work Arrangements
Flextime
A plan whereby employees’ workdays are built around a core of mid-day hours when all workers are required to be present.
Workers can arrange their own starting and stopping hours before and after the core period.
Positive effects on employee productivity, job satisfaction, satisfaction with work schedule, and employee absenteeism.
Positive effect on absenteeism was much greater than on productivity.
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Flexible Work Arrangements (cont’d)
Compressed workweeks
Increase productivity
Less disruption from shift changes
Longer time-off-work periods
Reduced absenteeism
Longer workdays; fewer workdays:
Four-day workweeks, with four 10-hour days.
Two days on, two days off, three days on, then two days off, two days on, and so forth.
Three 12-hour shifts, and then off for the next four days.
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Other Flexible Work Arrangements
Job sharing
Allowing two or more people to share a single full-time job.
Work sharing
A temporary reduction in work hours by a group of employees during economic downturns as a way to prevent layoffs.
Telecommuting
Employees work at home using telephones and the Internet to transmit letters, data, and completed work to the home office.
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Key Terms
benefits
supplemental pay benefits
unemployment insurance
sick leave
severance pay
supplemental unemployment benefits
workers’ compensation
health maintenance organization (HMO)
preferred provider organizations (PPOs)
group life insurance
Social Security
pension plans
defined benefit pension plan
defined contribution pension plan
401(k) plan
savings and thrift plan
deferred profit-sharing plan
employee stock ownership plan (ESOP)
Employee Retirement Income Security Act (ERISA)
vesting
Pension Benefits Guarantee Corporation (PBGC)
early retirement window
cash balance plans
employee assistance program
flexible benefits plan/cafeteria benefits plan
job sharing
work sharing
telecommuting
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