MANG 4468 Exam 3

Benefit administration issues

-Who should be protected or benefited? Part-time/ Full-time Current/former Probationary Periods? Survivors of employees

Why the growth in employee benefits?

A. Wage and Price Controls B. Unions C. Employer Impetus D. Cost Effectiveness of Benefits E. Government Impetus F. Administrative Decision Making

Issues: Social Security

Number of retired workers is rising without a corresponding increase in # of contributors to offset costs

Maturity Curve: Years Since Last Degree Relative to Salary

Organizations rely heavily on external market data in pricing scientists' and engineers' base pay. The result is the use of a maturity curve.

unemployment insurance

Unemployment compensation is financed exclusively by employers that pay federal and state unemployment insurance tax in the majority of states

Claim Processing

is when an employee asserts an event has occurred and demands the employer pay. ◦A claims processor determines if the event occurred. ◦If so, determines eligible benefits. ◦If not denied, calculate payment level. ◦Ensure coordination of benefits.

Controlling Average Cash Compensation

-Adjustments to average cash compensation level can be made in two ways *Top down *Bottom up

Embedded Controls (Cont.)

-Compa-ratios }Variable pay -Range maximums and minimums -Analyzing costs -Analyzing value added ◦Compensation becomes an investment as well as an expense ◦Decisions are based on analysis of the return on this investment ◦Fairness cannot be forgotten

Embedded Controls

-Controls on managers' pay decisions come from two different aspects of the compensation process ◦The formal budgeting process as just discussed ◦Controls that are inherent in the design of the techniques

Retirement and Savings Plan Payments

-Employees rank pensions as one of the more important benefits -Two generic types of pension plans ◦Defined benefit plans ◦Defined contribution plans -Individual Retirement Accounts (IRAs) -Employee Retirement -Income Security Act (ERISA)

Defined Benefit Plans

-Employer provides a specific pension level defined in terms of: ◦Fixed dollar amount or ◦Percentage-of-earnings amount which varies with seniority -Employer finances this obligation by: ◦Following an actuarially determined benefit formula ◦Making current payments that will yield the future pension benefit for a retiring employee

Executive Benefits and Perquisites

-Executives typically receive higher benefits than other exempt employees. ◦ERISA requires they not be too far above others, the plans must also: cover a cross-section of employees, provide definitely determinable benefits, and meet vesting and nondiscrimination requirements. -Companies are being required to place a value on perquisites or "perks".

Benefits can include

-Healthcare -Education reimbursement -On-site child care -Financial counseling -Concierge service -Retirement

Managing Costs through Hours

-Hours of work is used to define employment -Firms examine overtime costs versus hiring costs to manage labor costs -Four factors in the labor cost model are not independent ◦Number of employees ◦Hours worked ◦Cash compensation ◦Benefit costs

Benefits planning and design issues

-How to attract good employees -How to deal with undesirable turnover

Handling these issues

-Integrating benefits with other compensation components -Strategies for ensuring external competitiveness and adequacy of benefits -Whether employee benefits are cost justified

How should benefits be financed?

-Noncontributory (employer pays total costs). -Contributory (costs are shared with employee). -Employee financed.

Benefits under Social Security

-Old age or disability benefits -Benefits for dependents of retired or disabled workers -Benefits for surviving family members of a deceased worker -Lump-sum death payments

Executive Compensation What Academics Say

-One explanation is social comparisons. ◦Market forces raise everyone's base pay, including executives. Criticized due to the gradual increase in the spread between CEOs and average employee salaries. -Who they compare themselves makes the difference

cost containment

-Probationary Periods -Benefit Limitations -Copay -Administrative cost containment -Outsourcing is a common cost containment strategy

Professionals

-Professionals ◦According the Fair Labor Standards Act, this category includes any person who has received special training of a scientific or intellectual nature and whose job does not entail more than a 20% time allocation for lower-level duties. Scientists and engineers are examples of professionals.

Defined Benefit Plans (cont.)

-Reasons for decline of DB plans Need for early investment -Disproportionate cost increases -Unfavorable accounting rules

Defined Contribution Plans

-Specific contributions by employer -Three popular forms of these plans ◦401 (k) plan ◦Employee Stock Ownership Plan (ESOP) ◦Profit sharing plan -Income tax deduction for the firm -Problematic during recruitment of high-talent executives -Cash balance plans are a hybrid of defined benefit and defined contribution plans

How much choice should employees have among an array of benefits?

-Standard benefit package -Cafeteria-style, or flexible, benefit plans -Market-based, or customer-driven, health care

Individual Retirement Accounts (IRAs)

-Tax-favored retirement savings plan that individuals can establish themselves -Mostly used to store wealth accumulated in other retirement vehicles, rather than as a way to build new wealth -Roth IRA and Traditional IRA

Some people are treated differently

-The chapter then focuses on compensation strategies for these special groups. ◦Supervisors, corporate directors, and executives with emphasis on executive compensation. ◦Scientists and engineers in high technology industries. ◦Sales forces. ◦Contingent workers.

Control Salary Level: Top Down

-Top-down budgeting begins with an estimate from top management of the pay increase budget for the entire organization -The total budget is then allocated to each manager, who plans how to distribute it among subordinates

Advantages of Flexible Benefit Programs

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 of Flexible Benefits Programs

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 costs 4.) Flexible benefit plans are subject to nondiscrimination requirements in section 125 of the Internal Revenue Code.

Employee Factors

1.) Equity: fairness historically and in relationship to what others recieve 2.) Personal needs as linked to: Age Sex Marital Status # of dependents

Compensation Forecasting and Budgeting Cycle

1.) Instruct managers in compensation policies and techniques 2.) Distribute forecasting instructions and worksheets 3.) Provide Consultation to managers 4.) Check data and compile reports 5.) Analyze forecasts 6.) Review and revise forecasts and budgets forecasts and budgets with management 7.) Conduct feedback with management 8.) Monitor budgeted vs. actual increases

Employer Factors

1.) Relationship to total compensation costs 2.) Cost relative to benefits 3.) Competitor Offerings 4.) Role of benefits in: Attraction Retention Motivation 5.) Legal Requirements

Guidance from Research on Pay Communication

Behavior Persistence of beliefs-Reluctance to accept evidence that contradicts existing beliefs Anchoring/framing-Initial data strongly affect decisions/beliefs Herding- Following fashions in programs/techniques Pattern recognition- People "discover" patterns in random events. They believe correlation means causation.

Are your benefits legally defensible?

Complicated tax codes

Communicating the Benefits Program

Employee benefit communication. ◦Revolves around four issues: -what is communicated, to whom, how it is communicated, and how frequently. ◦The most common method is the employee benefit handbook. ◦Effective communication involves repetition and consistency. 'e-benefits' are a huge trend.

Control Salary Level: Top Down (cont.)

Factors influencing decision on the increase of the average pay level for the next period: ◦Current year's rise (% change) ◦Ability to pay ◦Competitive market pressures ◦Turnover effects ◦Cost of living *The Consumer Price Index (CPI)

Benefits Administration Issues

Four Major Issues in setting up a benefit package: -Why should be protected or benefited? -How much choice should employees have among an array of benefits? -How should benefits be financed? -Are the benefits legally defensible?

Control Salary Level: Bottom Up

Instead of telling managers what their salary budget will be, bottom-up budgeting starts with manager's recommendations

What are Labor Costs?

Labor Costs= # of workers and hours worked X (average cash compensation + average benefit cost_

Social Security

Provides a foundation of basic security for American workers and their families. -Money comes from contributions made by: employees, their employers, and self-employed people during working years

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)

Structuring the Compensation Function

Who should have the responsibility for the design and administration of pay system? ØCentralization - decentralization ØFlexibility within corporate-wide principles ØReengineering and outsourcing ØBalancing flexibility and control

Pay as Change Agent

ØPay often plays a singular role when organizations restructure ØStrategy changes, pay changes and people pay attention to money ØPay changes play two roles in any restructuring ØLeading catalyst for change ØFollower of change

Reasons for communicating pay information

◦Considerable resources are used in designing a fair and equitable system ◦Employees seem to misperceive the pay system *Under/overestimate others pay *Underestimate value of benefits

Often used to cut labor cuts

◦Cuts take form of layoffs or exit incentives ◦Advantages of Reduction in Force (RIF) *Reduces benefit costs *Opportunity to re-shape workforce and create positive sorting effects *Should be based on performance

Employee's understanding of the pay system is shaped:

◦Indirectly through the paychecks they receive ◦Directly via formal communication

Financial planning is integral to managing compensation

◦Involves creating a compensation budget that requires tradeoffs employee contributions versus across-the-board, short- versus long-term incentives, performance versus seniority, and cash compensation compared to benefits. Planning allows potential returns to be identified.

Potential problems of headcounts reductions

◦Regulatory requirements (e.g., ADA) ◦Employee relations ◦Involuntary turnover leads to voluntary turnover ◦Costs *Short term: unemployment, productivity, admin ◦Little room for reduction in headcount in lean companies ◦Adverse long-term effects *Cut too many may have to hire again

Financial planning is integral to managing compensation

◦Requires understanding the potential returns gained from the allocation. In short a focus on return on investment not just an expense