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Human resource management gaining a competitive advantage 2014 chapter 13

• The average cost of benefits adds up to
about 37 percent for every payroll dollar
– benefits compose about 27 percent of the total
compensation package.

• Benefits are unique because:
– there is more regulation of benefits than of
direct pay.
– benefits have become almost obligatory for
employers to provide.
– benefits are complex for employees to

Reasons for Benefits Growth
• Laws mandating benefits passed during and
after the Great Depression
• Wage and price controls instituted during WWII
and labor shortages

• The tax treatment of benefits programs
– The marginal tax rate is the percentage of an
additional dollar of earnings that goes to taxes

• Large group v. individual insurance
• Organized labor
• Employer differentiation


Benefit Programs

Social Insurance


Pay For Time Not

Private Group



Social Security
• Social Security includes provision for old-age
insurance, unemployment insurance, survivors'
insurance, disability insurance, hospital insurance,
and supplementary medical insurance.
• Social Security retirement benefits are free from
federal tax and free from state tax in some states.
• Currently, full benefits begin at age 65 or a reduced
benefit can begin at age 62.
• Both employers and employees are assessed a
payroll tax.

• The eligibility age for benefits and any tax penalty for
earnings influence retirement decisions.

Unemployment Insurance
• Unemployment insurance has the following
– to offset lost income during involuntary unemployment,
– to help unemployed workers find new jobs,
– to provide an incentive for employers to stabilize
– to preserve investments in worker skills by providing
workers with income during short-term layoffs.

• Unemployed workers are eligible for benefits if they

have a prior attachment to the workforce,
are available for work,
are actively seeking work,
were not discharged for cause, did not quit voluntarily,
and are not out of work because of a labor dispute.


Workers’ Compensation

• Workers' compensation laws cover jobrelated injuries and death.
• The system is based on no-fault liability.
• Approximately 90 percent of U.S. workers
are covered.


Private Group Insurance
• Offered at the discretion of employers, and plans are
not legally required.
• Group rates are lower because of economies of
scale, the ability to pool risks, and the greater
bargaining power of a group.
• Medical insurance tends to be the most important
benefit for people.
– The Consolidated Omnibus Budget Reconciliation
Act (COBRA) requires employers to permit employees
to extend their health insurance coverage at group
rates for up to 36 months following a qualifying event,
such as termination.

• Disability insurance includes short-term plans and
long-term plans.

Defined Benefit Plan
• Guarantees a specified
retirement benefit level to
• Insulates employees from
investment risk, which is
borne by the company.
• PBGC guarantees basic
retirement benefit in case of
financial difficulties.
• ERISA increased the
fiduciary responsibilities of
pension plan trustees,
established vesting rights and
portability provisions, and
established the PBGC.

Defined Contribution Plan
• Does not promise employees
a specific benefit level upon
• Employers shift investment
risk to the employee.
• There is no need to calculate
payments based on age and
• Most prevalent in small


Types of Defined Contribution

Money Purchase Plan

Employee Stock
Ownership Plan

Profit-sharing Plan


Cash Balance Plans

• An employer sets up an
individual account for
each employee and
contributes a percentage
of the employee’s salary.
• The account earns
interest at a predefined


Funding, Communication, and
Vesting Requirements
• A summary plan description (SPD) obligates
employers to describe the plan's funding,
eligibility requirements, risks, and so on.
• ERISA guarantees that employees, after working
a certain number of years, earn the right to a
pension upon retirement.
– These are referred to as vesting rights.

• Vesting schedules that may be used are as
– Employees are vested after five years of service.
– Employers may vest employees over a three- to
seven-year period, with at least 20 percent in the
third year and each year thereafter.


International Comparisons
• Percentage of private sector labor force
that is covered by a pension:
– United States, 45 percent;
– France, 100 percent;
– Switzerland, 92 percent;
– Germany, 42 percent
– Japan, 39 percent.


Pay for Time Not Worked
• In the European Community, as many as
30 days of mandated vacation is
• In the United States, there is no legal
minimum, although 10 days is common.
• Sick leave programs often provide full
salary replacement for a limited period of
time, usually not exceeding 26 weeks.
• The amount of sick leave is often based
on length of service, accumulating with

Family-Friendly Policies
• To ease employees’ conflicts between work and
nonwork, organizations may use family-friendly
policies such as family leave policies and child
• The Family and Medical Leave Act:
– applies to organizations with 50 or more employees
within a 75-mile radius
– applies to childbirth or adoption; care for a seriously ill
child, spouse, or parent; or for an employee's own
serious illness.
– Employees are guaranteed the same or comparable
job when they return to work.
– Employees with less than a year of service or those
who work less than 25 hours a week are not covered.

Family-Friendly Policies
• Child Care - Employers may
provide some type of child
care support to employees:
– supplies and helps employees
collect information about child
– vouchers or discounts for
existing child care facilities, or
– child care facility at or near


Managing Benefits: Employer
Objectives and Strategies
• Surveys and Benchmarking
– The company should know what the competition is
– Surveys information is available from private
consultants, the Bureau of Labor Statistics (BLS),
and the Chamber of Commerce.

• Cost control
– The larger the cost of a benefit, the greater the
possibility for savings.
– The rate of growth may result in serious costs in
the future.
– Cost containment efforts can only work to the
extent that the employee has significant direction
in choosing how much to spend in a benefit

Healthcare: Controlling Costs
and Improving Quality
• In the United States, health-care expenditures
have gone from 5.3 percent of the GNP in 1960
to 14 percent recently.
• Attempts at cost control have come through
employers, since most health care is provided
through organizations.
• A recent trend has been to shift costs to
employees through the use of deductibles,
coinsurance, exclusions and limitations, and
maximum benefits.


Healthcare: Controlling Costs
and Improving Quality
Health maintenance
organizations (HMO)
• focus on preventive care and
outpatient treatment.
• require employees to use
only HMO services and
providing benefits on a
prepaid basis.
• physicians and health-care
workers paid a flat salary to
reduce incentive of raising

Preferred provider
organizations (PPOs)
• have contract with employers
and insurance companies, to
provide care at reduced fees.
• do not provide benefits on a
prepaid basis.
• employees often are not
required to use just the
• tend to be less expensive
than traditional health care
but more expensive than


Employee Wellness Programs
• Focus on changing behaviors both on and off
work time that could eventually lead to future
health problems.
• There are two broad classes of EWP’s:
– Passive
• use little or no outreach to individuals and provide
no ongoing motivational support.

– Active
• assume that behavior change requires not only
awareness and opportunity, but also support and


Health Care Costs and Quality:
Ongoing Challenges
• Two important phenomena are often
encountered in cost control efforts
– Piecemeal programs may not work well
because steps to control one aspect may
lead to employees to “migrate” to other
programs that provide medical treatment at
no cost to them.
– There is often a so-called Pareto Group,
which refers to a small percentage of
employees being responsible for generating
the majority of healthcare costs.

Staffing Responsibilities that
Control Benefits Cost Growth
• Because benefit costs are fixed, the
benefits cost per hour can be reduced
by having employees work more
• Have employees classified as exempt,
since they can then reduce their
benefit costs per hour without having
to pay overtime.
• Classify workers as independent
contractors rather than employees,
eliminating the employer's obligation to
provide legally required benefits.

Nature of the Workplace
• Assessing employee benefits
preferences is essential.
• One approach is to use market research
methods to assess employees’
preferences the same way consumers’
demand for products and services are
• Care must be taken not to raise
employee expectations regarding future


Flexible Spending Accounts
• These plans permit employees to choose the
types and amount of benefits that they want.
• Advantages include:
– employees can be more aware and appreciative of
their benefits package
– a better match between the package and the
employee's needs, which improves satisfaction
and retention
– cost reductions are often achieved

• Disadvantages include:
– high administrative cost
– adverse selection

Communicating with Employees


Flexible Spending Accounts
• Permits pretax contributions to
an employee account that can
be drawn on to pay for
uncovered health care
• Funds must be spent during
the year or they revert to the
• The major advantage is that
take-home pay increases.

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