MGMT 434 Compensation ch 12

Benefits Determination Process

o Companies do not know if even ordinary benefits have positive payoffs. § Employees rate benefits a key factor in job satisfaction. § Yet, less than half are satisfied with their benefits. § There is a mismatch between cost to employer and perceived value to employee.

Components of a Benefit Plan - Employee Factors

o Equity. § Perceived fairness must be considered in determining employee needs - even if the perceived unfairness in not rational. § Beware the "bandwagon" effect of offering benefits to avoid hard feelings. o Personal Needs of Employees. § One way to gauge preferences is to look at demographic differences. · Studies have revealed universal preference trends. § Employers may survey individuals about their needs. § Employers may offer a flexible benefit plan, or cafeteria-style plan. · Theoretically, this is ideal as employees identify benefits of greatest value to them and benefit managers are able to control costs.

Benefit Administration Issues: Who should be protected or benefited

o Probationary periods, dependents, retirees, survivors, workers with disabilities, and even layoffs offer challenges.

What does a first-class benefit plan include as a mix of benefits?

§ Education reimbursement. § On-site child care services. § Car cleaning. § Financial counseling. § Concierge services. § Retirement benefits.

Factors Influencing Choice of Benefit Package

Employer Factors: 1. Relationship to total comp costs 2. Cost relative to benefits 3. Competitors offering 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

· Administering the Program: Communication

o Benefits communication revolves around four issues. § What is communicated. § To whom. § How it is communicate. § And how frequently. o Efforts focus on identifying methods (how) of communication. § The employee benefit handbook. o Effective communication should match the message with the appropriate medium. Failure to understand benefit components and their value is one of the root causes of employee dissatisfaction with benefits

· Administering the Program: Claims Processing

o Claims processing arises when an employee asserts a specific event occurred and demand the employer fulfill a promise. o A claims processor determines if the event actually occurred. § If the event occurred, the next step is determining eligibility. § If payment is not denied, the claims processor calculates payment. § It is important to coordinate benefits. · If multiple insurance companies are liable, a good processor can save 10-15% of a claim's cost by ensuring joint payment.

The value of employee benefits

o Employees consistently rank medical benefits as the most important benefit. o A major concern is evidence that employees frequently undervalue the benefits provided. o The perceived value of benefits rises when employers introduce choice through flexible benefit packages. o Employers have to plan and design effective benefit programs. § They also need to communicate their value to employees. o Ranking Employee Benefits

· Administering the Program: Cost Containment

o Employers audit their benefit options for cost containment opportunities. § Probationary periods. § Benefit limitations. § Co-pay. § Administrative cost containment. § Deny service on pre-existing conditions. § Negotiate lower fees by providers. § Develop programs that encourage wellness. § Outsource benefits and administration. § Self-insure. Provide accommodations for employees returning to work after an illness or

Benefits Planning and Design Issues

o Employers must decide the role of benefits in their overall compensation package. o Planning should include strategies for ensuring external competitiveness and adequacy of benefits. § Firms conduct benefit surveys of competitors. § Ensuring benefits are adequate is a bit more difficult. · There is no magic formula. · The answer may lie in the relationship between adequacy and cost of effectiveness. · Employers are shifting increased benefit costs to employees through higher deductibles and co-pays.

Benefit Administration Issues: How much choice should employees have?

o One extreme designs a benefits package for the average employee. o The other extreme is flexible benefit plans. o Flexible plans increase employee recognition of benefit value. o Companies may offer market-based, or customer-driven health care. o Basic issues of consumer-driven health care. § The employee pays a high deductible and coinsurance. § The inducement is for the employee to shop around for the lowest rate.

Components of Benefit Plan - Employer Factors

o Relationship to Total Compensation Costs. § Benefit costs are only one part of a total compensation package. o Costs Relative to Benefits. § Adopt a broad, cost-centered approach. o Competitor Offerings. § Determine external equity with a benefits survey. o Role of Benefits in Attraction, Retention, and Motivation. § Benefit schedules favor longer-term employees. § For benefits to matter, they must meet employee needs. o Legal Requirements. o Absolute and Relative Compensation Costs

What are the causes of growth in the Employee Benefits Costs

o Wage and Price Controls. § In WW II and the Korean War. o Unions. § Began negotiating for benefits. § Several common benefits arose with unions. o Employer Impetus. § Traced to concerns over satisfaction and productivity. § Without data about payoffs, benefits became a costly entitlement. o Cost Effectiveness of Benefits. § Most benefits are not taxable. § Group-based plans may be had at a much lower rate. o Government Impetus. § Worker's compensation. § Unemployment insurance. § Social security. § Also laws such as the Employee Retirement Income Security Act (ERISA) and various IRS codes.

What type of extra benefits do they offer at Google?

§ 12 weeks paid leave for new parents - either gender. § $500 in "Baby Bonding Bucks." § Liberal policies for volunteering. § On-site fitness centers and medical care. § Lavish paid daily lunches. § College tuition reimbursement.

Benefits Administration - Financing and Legal Issues: Are the benefits legally defensible

§ Benefits have to comply with hundreds of arcane sections of the tax code among other things. § Benefit administrators may develop compliance checklists and conduct audits to ensure compliance with new and existing requirements.

Benefits Administration - Financing and Legal Issues: How should benefits be financed?

§ Noncontributory - employer pays total costs. § Contributory - costs are shared between employer and employee. § Employee financed - employee pays total costs for some benefits.

Employee Benefits can no longer be called "fringe benefits" but the cost has risen over time ex:

§ The average costs of benefits accounts for 30% of total compensation. § Benefits add 44 cents to every dollar of wages and salaries.