This textbook chapter examines how to plan employee benefit packages while controlling costs.
INTRODUCTION
"Why are
they so anxious to offer improved maternity benefits in our health
program? After all, at 50 I'm not likely to care about that!"
"What do you think the union
is going to demand in new benefits this time around?"
"It sure is hard to have a
retirement plan plan when you have to meet all these government
requirements!"
"Why should we worry when
there is Social Security?"
"We have got to do something
to get the medical program costs under control. I want a plan by next
week!"
Essentially the wage form
decision is a choice between taking payment in a periodic paycheck or
deferring it in some form of benefit. Either one is a cost to the
organization. There are reasons, however, from both an organizational
and a personal standpoint that some proportion of the total wages paid
to employees should be in the form of benefits.
BENEFIT PROGRAMS
The total wage cost of an employee to the organization is far more
than the pay rate of that employee. Likewise, the total compensation
reward of the employee exceeds his or her take-home pay. Total
compensation consists partly of the pay of the employee and partly of a
set of other rewards that are loosely called benefits. The
addition of these items to the compensation package complicates the
administration of compensation considerably. Benefits are unlike base
pay in that they are awarded for different objectives, they are not
periodically given, they are oftentimes deferred rather than current,
and they require different types of administration. The basic decision
is often called the wage form decision because, since pay and
benefits together make up the wage costs of the organization, there is a
trade-off between direct pay and benefits. Benefits are becoming more
important in compensation administration as they become a larger
proportion of total compensation. Today it
is especially important to properly manage them.
Membership Rewards
Benefits are important as a reward, in that organizations wish to
reward employees not only for their job and performance, but also for
their membership in the organization. The rewards discussed are
ordinarily given to employees on the basis of being members of the
organization, not on the basis of the job held or performance on that
job. Thus they are called membership rewards.
The emergence of
membership rewards attests to the differences between the employment
exchange and the economic exchange as it is narrowly conceived. These
rewards indicate that organizations are aware that in the employment
exchange they are purchasing not only labor services but also
organizational attachment sufficient to provide the continuity required
to accomplish their goals. Thus, membership rewards are evidence that
organizations take a broader view of the employment exchange than is
traditionally embodied in wage and salary administration.
If this view is correct,
membership rewards in organizations would be expected to vary with the
breadth of the organization's view of the employment exchange. Viewing
the employment exchange strictly in economic terms would be expected to
lead to few membership rewards and to temporary employment of the
employee. On the other hand, viewing the employment exchange in a
broader sense should lead to a broad base of membership rewards, as the
organization attempts to secure long-term commitment from its
employees. This situation is much more typical in a primary labor
market.
Employees, too, find it
useful to broaden the definition of the employment exchange and seek
membership rewards from their employer. Those employee groups with the
strongest commitment to the organization have always received membership
rewards. When groups are requested by the organization to increase
their organizational commitment, they typically request more membership
rewards. Thus, organizations that request and/or require high levels of
commitment over time find considerable pressure from employees for
membership rewards. Fortunately, this thought process does not have to
be conscious on the part of either the organization or the individual to
be valid.
Diversity of
membership rewards
Unlike
establishing a specific wage rate for a person, the determination of
membership rewards is fragmented rather than unitary. It represents a
hodgepodge of economic rewards, most of which are awarded on the basis
of the person accepting the role of being an employee. Unfortunately,
none of the parties to the exchange has a clear definition of the
boundaries of this set of rewards. There is a lack of agreement on what
is or is not to be included, the purposes to be served, responsibility
for programs, the cost and value of the various elements, the units of
measurement for determining worth, and the criteria to be used. As a
result, decisions in the area of membership rewards are more complex and
confusing than those involved in determining wages and salaries.
This complexity is
increased by the ambivalence shown by both organizations and employees
toward membership rewards. As stated, organizations find that
consideration of membership rewards is outside of their typical economic
definition of the employment exchange. So while they perceive the need
for these rewards, they do not fit them into their definition of the
exchange. Employees and their representatives also have ambivalent
feelings. Membership rewards are often viewed by employees not so much
as rewards for membership, but as a right accompanying
employment. Indeed this position is supported by much of the legislation
in the field.
Terminology
Just as the particular rewards that constitute membership rewards
are diverse, so is their terminology. Fringe benefits is the most
common name given to this set of rewards, but indirect compensation,
wage supplements, non-wage benefits, social wages, supplementary
employee remuneration, supplementary compensation, and indirect
payments have also been used. Here simple term benefits will
be used.
All of these terms
suggest that these rewards are ancillary and not a significant part of
total compensation. Neither is true. As indicated, membership rewards
are important in maintaining a consistent work force. These rewards can
no longer be considered a small part of the total compensation package
when their total cost exceeds 50 percent of direct wage payments.
There is no common
definition of what is included in the benefit package. Two historic
organizations, the U.S. Chamber of Commerce and the Bureau of Labor
Statistics, have been conducting surveys of benefit costs for over 50
years. Both include social insurance,
private welfare plans, and paid leave; but the BLS also includes premium
pay, while the Chamber of Commerce includes company-paid time off the
job and certain employee services.
There are other
classifications of benefits. A common one is offered by Sargent and has
the following categories: (1) pay for time not worked; (2) monetary
rewards and prizes for special activities and performance; (3)
contributions and profit sharing; (4) payments for employee security;
and (5) practices and services that benefit employees.
Organizations differ
considerably in what they include in their own definitions. For
instance, some will include legally required benefits, and others only
the ones that are voluntary. Unions and management also often differ,
with unions often excluding employee services, premium pay, and paid
leave. Some of these differences as to what
constitutes benefits are a function of whether certain costs are seen as
obligations of employers for the social welfare of their employees and
therefore not as rewards at all. A basic
premise of this viewpoint is that unions turned to employers to provide
benefits when it became apparent that they would not be provided through
social legislation. These benefits do not constitute rewards so much as
rights of the employed individual. If this analysis is valid, we
could expect increased pressure on organizations to provide benefits as
long as the atmosphere in Washington is "hands off" toward social
programs. The current push for day care can be seen as an expression of
this viewpoint.
The confusion in benefit
definition does not provide organizations with a good way of defining
the benefit package. A better way is to work backwards from the total
cost of having a person on the payroll. Benefits would then be all costs
beyond the direct wage paid to the individual. The BLS has defined total
compensation as all payments to employees subject to income-tax
withholding and all payments made by the employer to government
agencies, insurance companies, or trustees for insurance and
welfare. This would leave out employee services, which probably should
be added if the organization wishes to get a complete picture of
employee cost. Exhibit 7-1 is a list of items that might be included as
benefits.
None of the above
discussion describes the purpose for the organization providing the
reward. The common viewpoint is that the major purpose of all this
hodgepodge of rewards is to increase the attractiveness of the
organization to the individual, so that he or she will continue as an
employee. Remember, however, that for a reward to be a part of the
employment exchange, it must be perceived and considered relevant.
Unlike the paycheck, many of these benefits are hidden from the
employee, especially if they are deferred for long periods. This
suggests that benefit administration requires a large component of
communication.
Exhibit 7-1.
Examples of Benefits
1. Extra payments for
time worked:
Weekend premiums
Holiday premiums
Overtime premiums
Shift premiums
2. Non-production awards
and bonuses:
Anniversary awards
Attendance bonus
Christmas bonus
Quality bonus
Safety awards
Shift premiums
Weekend premiums
Service bonus
Suggestion awards
Waste-elimination bonus
Year-end bonus
3. Payments for time not
worked:
Call-back pay
Call-in pay
Clean-up time
Clothes-changing time
Dental-care time
Down time
Family allowances
Holidays paid for but not worked
Jury duty time
Lay-off pay
Medical time
Military induction bonus
Military service allowance
National Guard duty
Paid death-in-family leave
Paid lunch periods
Paid sick leave
Portal-to-portal pay
Religious holidays
Reporting pay
Reserve military duty
Rest periods
Room and board allowances
Severance pay
Supper money
Time spent on contract negotiation
Time spent on grievances
Vacation pay
Voting time
Witness time
4. Payments for employee
security,
Contributions toward:
accident insurance
disability insurance
hospitalization insurance
life insurance
medical insurance
surgical insurance
Contributions to state disability insurance
OASI contributions
Contributions to unemployment compensation
Supplements to unemployment compensation
Contributions to Workers' Compensation
Supplements to Workers' Compensation
Contributions to employee thrift plan
Contributions to employee stock purchase plans
Credit union
Employee loan association
Health and welfare funds
Home financing
Mutual benefit association
Payment of optical expenses
Pensions
Savings Bond administration
5. Payents for employee
services:
Annual reports to
employees
Beauty parlors
Cafeteria
Canteen service
Company athletic teams
Company housing
Company stores
Day Care
Income tax service
Information racks
Dietetic advice
Educational assistance
Employee counseling
Employee discounts on purchases
Employee parties
Employee pleasure trips
Employee publications
Financial advice
Flowers for ill and deceased employees and families
Free laundry
Free meals
Functions for retired employees
Health education
Hospital Facilities
Legal aid
Lunch period entertainment
Medical examinations (voluntary)
Music at work
Paid club memberships
Paid subscriptions to magazines
Parking space operation
Purchasing service
Reading room facilities
Recreational facilities
Rest room facilities
Safety clothes at company expense
Safety programs
Scholarships
Shower and locker rooms
Transportation
Vacation facilities
Visiting nurse
Wedding gifts
Work clothes at company expense
THE GROWTH IN
BENEFITS
Originally membership rewards were called fringe benefits
because they were only a small portion of the total compensation
package. Not so today. The growth of benefits has far exceeded the
increase in wages, even during inflationary periods, for the past 40
years. In fact, the growth has been three times that of wages and
salaries.
The Chamber of Commerce
found that by 1980, benefits were accounting for 36.9 percent of
payroll, or an average of $6,084 per employee; in the year 2000, that
estimate was 42.3 percent of payroll, or well over $11,000 per
employee. The total benefit bill in the country ran about $435 billion
in 1980, in 2000 it was close to $1 trillion.
There does not seem to be
any significant lessening of this growth. The increases have come about
in two ways. First, there has been a considerable increase over time in
the number of benefits offered by employers. Second, the cost of the
benefits themselves has risen dramatically. Health insurance is the
prime example of the latter.
The
figures just cited, however, are averages and do not represent the
amounts spent on benefits by particular organizations or
industries. When it comes to expenditures on benefits, there exists a
good deal of variation between industries, as well as between companies
within an industry. The petroleum industry spends over half of its total
compensation dollar on benefits; hospitals spend a little over a
quarter. Traditionally, government organizations have offered higher
benefits or at least are perceived as doing so.These variations may represent a number of differences in compensation
policy, including the emphasis placed upon the value of continuity in
membership.
This
dramatic growth in benefits has come about for a number of reasons.
These include (1) changes in the economy, (2) social responsibility, (3)
government influence, (4) union demands, and (5) employee interests.
CHANGES IN
THE ECONOMY
The continuing industrialization in modern times, or more accurately
the move toward a postindustrial society, has created changes that
encourage organizations to provide more benefits to employees. One of
the effects of an increasing standard of living is that people's desire
for leisure increases in proportion to their desire for more wages. In
economic terms, the elasticity of the supply of labor is such that as
wages rise, there is a point at which leisure becomes more appealing
than more work, even work at a higher wage. At this point there is a
demand for more time off by employees in North America, mirroring the
European trend.
Continuing industrialization and consequent changes in modes of living
have brought new risks to the employee and increased old ones. At the
same time increased productivity has afforded programs that provide
security against these risks. Economic security in a society in which
most individuals are employees depends on finding and keeping a job. Any
threat to continuing employment becomes a risk to the employee and the
family, and creates a demand for insurance against such risk. The result
is that at least a portion of individual compensation represents
protection against insecurity.
Social Responsibility
Social responsibility may not be the best name for the response by
employers to the needs of their employees, but it does get across the
point. As far back as the 1920s, organizations began to realize that
their employees were assets that needed to be preserved rather than
exploited. This awareness has varied over time. At first there was a
reaction to unions that created an era of paternalism, encouraging
employers to offer many employee services in the hope that employees
would see that their employers had their best interests at heart. This
would keep the employees from joining a union.
Recently there has been a new trend in providing employee services, but
the motivation is different. Today it is seen that an employee who is
healthy, both physically and mentally, is a more productive person. This
has led to a series of employee services, such as athletic facilities
and counseling in areas such as smoking and drug abuse, intended to
create and maintain a healthy work force.
A
current issue in this area is whether employers have a responsibility to
provide care for children of employees. With the increase in the number
of women in the work force and the number of working women who are the
only support of their families, the demand for day-care facilities for
children has increased dramatically. There is presently considerable
debate as to who is going to provide these facilities, but it is clear
that employers will play an important part. There is evidence that
facilities close to the work site provide a better solution than those
near the home.
Government Influence
The influence of
government on benefits has come in three ways: directly through
legislation, directly through attempts to control the economy, and
indirectly through the tax laws. In the 1930s there was a flurry of
legislation that produced organizational requirements in the areas of
Workers' Compensation, unemployment compensation, Social Security, Old
Age and Survivors' Benefits, and disability insurance. More recently,
some state legislation has provided for employer and employee
contributions toward non-work accidents and illnesses.
Since
the 1960s there has been a new flurry of legislation, designed not to
create new benefits but to control programs currently offered by
organizations. The most critical of these acts are the Employee
Retirement Income Security Act (ERISA), dealing with retirement plans;
the Civil Rights Act, which affects all areas of benefits; the
Occupational Safety and Health Act (OSHA), which deals with safety
standards on the job; and the Consolidated Omnibus Reconciliation Act
(COBRA) and the Health Insurance Portability Act (HIPAA), which deal
with health insurance.
The
latter act, HIPAA, is worthy of full study. Since 1974, U.S. federal
law has been firmly established related to welfare and retirement
benefits. States are not allowed to pass laws that supersede ERISA. For
medical benefits and insurance, that feature (which allowed companies to
easily operate across state boundaries) has now been amended by HIPAA so
that states that pass laws that are more favorable to employees related
to medical benefits have the right to supersede federal law. Companies
must now deal with the fact that certain states Kentucky, for example,
mandates chiropractic services be provided, while most others states do
not.
At
times, usually wartime, the government has imposed wage and price
controls. These controls have given a strong impetus to the growth of
benefits by permitting improvements in benefits while discouraging wage
and salary increases on the grounds that the latter would contribute to
inflationary pressures (while the former would not). Clearly, this view
is that benefits are fringes.
An
equally important,but indirect, influence of the government on benefits
has been income-tax legislation. High corporate income-tax rates make it
advantageous for employers to include as business expenses a wide range
of benefits, particularly those to executives. Since most of these
benefits are not taxed as income, provision of these benefits results in
huge savings for the employer. The future of this reason for benefits is
in doubt. Most suggestions for income-tax reform contain restrictions on
what organizations can write off as expenses, and most propose to tax at
least some benefits.
Union Demands
Union demands have served to increase benefits as a proportion of
total pay. The growth of the unions during the 1930s occurred largely in
the mass-production industries. Workers in these industries were much
more prone to the risks of industrial life than were craft workers, and
so the leaders of industrial unions made it a point to demand protection
from insecurity for their members.
In this
way union leaders of industrial unions have fostered member interest in
programs providing protection from insecurity. Sometimes a benefit has
been demanded to establish a principle of employer responsibility for
risks facing workers. The UAW's fight for the guaranteed annual wage is
a case in point: the union felt that a large portion of the down time in
model changeovers could be reduced by management. At other times,
benefits have been sought when pay increases appeared infeasible. A.M.
Ross has suggested that unions have sought to expand benefits for a
number of reasons, including their desire for (1) increased status, (2)
security, (3) a shorter work week, (4) more strength in the eyes of its
members, and (5) the development of the plant as a community.
Employee Interest
To the employee,
the advantages of benefits are many. Certainly the two most prevalent
are the tax advantages mentioned and the lower cost of receiving the
benefit by belonging to a group. The fact that over half of all benefits
are intended to reduce economic insecurity suggests that both employers
and employees are aware that life in an industrial society requires
these protections.
At
best, however, employee attitudes toward benefits are ambivalent. On one
hand, people seem very interested in benefits, since this is a major
item of consideration in the recruiting process. On the other hand, most
employees do not know what benefits the organization is providing them
and particularly the cost to the organization of those benefits. In a
way, benefits appear to be a classic case of what Frederick Herzberg
calls a hygiene factor or dissatisfier.
When the benefit is absent, the person wants it. When it is present, it
has no positive motivational force.
Early
studies of benefits found that they were not very important to
employees. More recent studies have
shown a consistent upturn in interest in benefits. The increasing
standard of living would suggest this, given the preceding analysis of
the value of money versus benefits at high levels of income. Newer
studies have shown that employees place a high value on benefits, even
beyond their tax advantages and reduced price. Employees differ
understandably in their demand for benefits and even more clearly in the
types of benefits they demand. This seems to vary most noticeably with
the personal circumstances of the employee. Young employees desire fewer
benefits compared with wages and time off. Employees with dependents
value medical benefits greatly, and the desire for good retirement plan
benefits understandably rises with age. In
all these cases, it should be noted that employees base their decision
on their perceived need, and not on the cost of the benefit to the
organization.
The
demographics of an organization's employees offer a hint as to the needs
and preferences of its members, but they are not an infallible guide.
William F. Glueck, in a review of employee-preference studies, found
that some demographic characteristics (particularly age and marital
status) were good predictors of benefit preference, but that others
(such as sex, age, and occupation) were not. Clearly
there is a ranking of desirability of benefits by individuals, but it is
not wholly predictable by employee characteristics.
WHY BENEFITS?
The use of benefits in the compensation package makes the process of
compensating employees much more complex. As indicated, benefits are a
hodgepodge of items, and planning and administering them is
time-consuming, costly and takes an expertise not available in many
organizations. So the question can be raised whether it is worth it to
include benefits in the compensation package. In summary, the following
reasons can be put forth as to why organizations have benefits in their
compensation package:
- They are required by
law. Most employees are covered by a number of federal and state laws
requiring that the organization provide a minimum level of benefits as
a condition of employing people.
- They are desired by
employees. Despite the misunderstanding and ambivalence of employees
toward benefits, employees insist upon them and they are a major
recruiting tool. Benefits probably increase the satisfaction of
employees or at least reduce dissatisfaction. The effect of this has
been shown to be lower turnover.
- They are demanded by
unions. Benefits provide alternative bargaining chips when direct
confrontation over wages is not feasible or desirable.
- They help to develop
an atmosphere of trust in the organization. Taking care of employees
through benefit programs increases the feeling that the relationship
between the organization and the individual goes beyond an economic
transaction.
- They provide more
stability in the economy. The more that benefits are oriented toward
reduction of insecurity among employees, the more stable is the
economic environment.
BENEFIT PLANNING
Decisions with
respect to benefits are made more complex because of confusion of
purpose, lack of agreement on which benefits do and do not constitute
compensation, and the rapid growth of benefits and their costs. Perhaps
the only point of agreement is that benefit administration is changing.
To the
employer, decisions on benefits represent a large and growing proportion
of compensation expenditures and thus a large part of the organization's
contribution to the employment exchange. To the union, benefits are
often perceived as a social obligation of the employer and a right of
the employee. To the employee, they represent protection from insecurity
and a reward for continuing their employment with the organization.
The
process of benefit planning, then, is one of deciding why benefits are
being offered, what benefits to offer, and to whom? The first of these,
the why question, was discussed in the preceding section. The other two
questions are examined in this section.
What Benefits to Offer
Superficially, benefit decisions are similar to wage level decisions.
In both instances, the basic issue to the employer is that of labor
cost. The employer decision involves expenditures resulting from the
employment exchange, and from a cost standpoint the organization is
indifferent as to whether these costs are in the form of wages or
benefits. The tendency to talk about wages and benefits as a package
reinforces this view. Actually, however, decisions on benefits involve a
number of choices different from other wage decisions. Benefits are not
unitary, as are wages. There are many choices to make as to which ones
to offer, and there are a number of influences on these
decisions. Unions sometimes do and sometimes do not consider benefits to
be pay equivalents. As indicated, employees value benefits differently.
They do this not only on the basis of their own needs, but also upon
being convinced of their importance by the union and
management. Organizations differ greatly in the composition of their
work force and thus on the needs and desires of their employees. The
purpose served by the benefit decision
...
that of membership ...
is different from the job and performance considerations in the wage
decision. Some of the considerations in deciding what benefits to offer
are treated in the rest of this section.
Legislation
Social legislation requires that the employer make expenditures for
the health and safety of employees and for various forms of insurance to
indemnify employee loss of income from illness and injury, unemployment,
and old age. The law also determines how the organization will develop
and operate specific benefits, particularly retirement plans. These
expenditures are required whether or not the employer wants to make them
and whether or not the employee desires the resultant benefit.
It
might be argued that these expenditures are not truly compensation based
upon the employment exchange but are merely a convenient method whereby
society insures that its members are protected from certain risks. But
to the employer, they are expenditures that arise from hiring people,
they are of benefit to the employees, and they do substitute for or at
least diminish the ability to pay direct wages.
It may
be possible, however, that these benefits are not benefits in the eyes
of the employee. The employment exchange requires that the person be
aware of and consider as relevant any item for it to be a part of the
exchange. So if an employee is not aware of the employer's expenditure
or does not care for the benefit, the employer is making a contribution
to the exchange for which the organization is not receiving a
return. The only alternative for the organization is to try to convince
the employee of the importance of the benefit.
Legally
required benefits currently cost employers a minimum of 10 percent of
their payroll. These are the direct payments made and do not include
administrative costs or costs of legal requirements affecting the
workplace.
Benefit Surveys
Another consideration in benefit planning is industry and area practice
regarding benefits. In order to keep employees, the organization must
remain competitive for labor services, and knowing what benefits other
employers are offering is necessary for decisions about what benefits to
offer. Surveys of benefits, then, are conducted for the same reason as
wage and salary surveys ...
to obtain information on the conditions prevailing in the labor
market. Community wage surveys include a number of benefits
practices. Employer-association wage and salary surveys customarily
include benefit-program information. Without this information the wage
rate information received in surveys may be misleading. The usual
benefits survey seeks prevailing practice in the form of enumeration of
the programs offered and descriptions of those programs and their
coverage. Tabulations consist of the number of responding organizations
having each type of program and, if possible, variations in programs by
employee group.
These
benefit surveys show employer concern with the membership rewards of
labor-market competitors. They also accord with union interest in
prevailing benefit practice. But it should be noted that the
information obtained in benefit surveys differs significantly from that
received in wage and salary surveys. Wage survey results record wage
costs. Benefit surveys record practice, and the costs of that practice
to different organizations may be very different. This difference can
result from differences in the organization's work force or in the
methods used to finance the benefits.
Ideally, an organization would know both the benefits offered by
competitors and the competitors' costs for those benefits. But the cost
figures are hard to get. It is difficult to cost out individual
benefits, and accounting practices vary considerably. As indicated, some
organizations see an item as a benefit and others do not. Cost
information on individual benefits may not be useful, since the
composition of the work force in each organization differs. What is
probably more important is to know the total benefit costs of your
organization and others.
Other
organizations' benefit practices and costs may not be relevant to your
organization unless you know that your employees desire the benefits
that others are offering. The next section discusses internal surveys of
employee benefit needs and desires. Even if the benefit is desired by
your employees, it is the cost to you and not other organizations'
practice that may be most important. This suggests that the prevailing
practice identified in surveys of other organizations should be coasted
out for your organization and this information used, along with employee
preferences, in benefit decisions.
This
section reinforces the complexity of benefit decisions. Compensation
decision makers are charged with making sure that all expenditures for
compensation benefit the organization. As benefits become a larger
proportion of total compensation, the impact of benefit decisions is
greater and more care must be taken with these decisions. In wage
decisions, comparison with other organizations may be an important
consideration in order for the organization to be competitive in the
labor market. In benefit decisions, however, although benefit practices
of other organizations are one consideration, they are less important
than the total cost of benefits and employee preferences. Unless
employees want a particular benefit, they are unlikely to consider it a
reward; therefore expenditures for that benefit do not enter the
employment exchange and would not create value for the organization.
Organizational Benefit Plan Analysis
Surveys of prevailing benefits may have the dysfunctional consequence of
encouraging particular benefit programs simply because they exist in
other organizations and not because they are wanted or needed by the
organization's employees. The present benefit structure in the U.S.
suggests that benefit decisions have been motivated by competition based
on a vague feeling that more benefits help an organization attract and
retain employees rather than by a careful analysis of employee needs and
preferences.
Internal organizational analysis of benefit practices would seem to
require a comparison of current benefit offerings with the needs and
preferences of employees. Our designation of benefits as membership
rewards is an aid in this analysis, for it specifies the organization's
purpose in offering benefits is to obtain and retain employees. But the
analysis gets complex because individual employees and groups have
different needs and preferences.
So the
internal organizational analysis of benefits focuses on the needs and
preferences of employees. Organizations differ in the demographic makeup
of their work force, and this should, in turn, create differences in the
types and levels of benefits that organizations offer. As discussed,
there are some predictable differences based upon factors such as age
and marital status, but the situation is so complex that it is hard to
predict the exact benefit needs and preferences just from a knowledge of
the organization's demographic makeup.
A
survey of employee preferences for benefits can be done by developing
and administering a questionnaire within the organization. This
questionnaire need not be very complex and can consist of a listing of
possible benefits that are to be ranked in importance by the employee or
rated on a scale of very important to very unimportant. It is useful to
have the respondents also indicate their own characteristics so that the
organization can determine if particular employee groups have
predictable preferences.
From
the results of the questionnaire, the desired and present benefits
package can be compared. Unmet needs of employees may call for
additional benefits. But overlapping benefits that provide more
protection than is desired are a waste of resources. One of the most
pressing problems in benefits today is that of overlapping benefits
provided to the two income family. When both members of the family work
they are often covered under each other's benefit program. The result is
that neither spouse's employing organization is receiving the maximum
value from providing the benefits, and the employees are frustrated
because they are receiving a duplicate unneeded reward.
Organizational Financial Analysis
A further part of the organization analysis is a comparison between
direct wages and benefits, in terms of both cost and employee need. This
comparison is needed for a couple of reasons. The first is to maintain a
balance between direct wages and benefits. Granting wage increases and
benefit changes independently can lead to excessive increases in payroll
costs where the organization loses control of the situation. Second,
changes in wages directly affect the cost of benefits in areas such as
vacation costs and holiday pay.
A
further part of the organization's financial analysis is like a
consideration also used in the wage level decision
...
the employer's ability to pay. We have indicated that benefit programs
are most often viewed as a package of individual benefits. The emphasis
on employee needs and preferences encourages this view of
benefits. Decision making from this approach ordinarily focuses on
identifying what the employee group needs and then finding out the
current cost of that benefit. When installed, the benefit is then based
upon the level of benefit and not the level of cost to the
employer. In the field of medical insurance this has had a disastrous
effect on employer costs. The focus on the level of benefits leads
employees to form their impressions of the employment exchange in terms
of this level of coverage and not on the cost of that coverage. This
makes it hard for the employer to lower the level of coverage
subsequently as costs rise beyond the value of the benefit.
The
other problem with the coverage approach is that it is only the employer
who is concerned with the problem of rising costs. While the employee
has the ability to control costs, but he or she has no incentive to do
so.
A
cost-based approach can use data from other companies, but such costs
are likely to vary between organizations not only because of the
different work-force characteristics described earlier but also because
of other factors, such as ratio of labor cost to total cost, variability
of demand, technical considerations requiring round-the-clock
operations, and profitability. Companies with high profits tend to have
high benefit costs, as do larger organizations, unionized organizations,
and organizations in low-labor-cost industries. Benefit expenditures
vary also by geography and community size.
All the
analysis discussed in this section and the previous one suggests that
organizations would be advised to have on their staff experts in
performing benefit analysis. Such benefit analyses require a knowledge
of a specialized field. This is particularly true of the organization's
insurance programs. The increased cost of medical insurance and the
legislative demands on retirement plan programs have made it imperative
that organizations have a high degree of technical expertise available
to them.
Collective Bargaining and Benefits
In unionized organizations the decision making just discussed is done
largely at the bargaining table. If it is assumed that union demands
reflect employee preferences and that organizations have analyzed their
own position, the results of collective bargaining can be advantageous
to all parties. The employees should be receiving the benefits they
want, and unions are motivated to convince employees of the value of the
benefits bargained for.
Unfortunately, unions often have goals that do not reflect employee
preferences in particular organizations. The union may be striving to
institute a benefit in the whole industry or to satisfy a majority of
the total union. Because of the political nature of unionism, there is
always pressure to achieve gains for the members, and benefits can often
appear to be a big gain when pay increases are hard to bargain
for. Further, union leaders often are caught in the same problem as the
management of an organization with a diverse work force: there is no
consensus on what the real needs and preferences of employees are.
Furthermore, if Allen is correct in concluding that benefits are
perceived by unions not as compensation but as the social responsibility
of employers to be obtained at the bargaining table because they could
not be obtained through social legislation, then unions have no reason
for considering the needs and desires of particular employees and
organizations. By this reasoning,
benefits become prerequisite to the employment exchange rather than
rewards from it, and unions may seek to attain them by calling them
wages or non-wages, whatever strategy works. According to this view,
unions represent all employees and not just their own constituency.
WHO RECEIVES
BENEFITS?
If benefits are truly membership rewards and not job- or
performance-related, then they should be equally available to all
employees. However, if an organization needs continuity of employment
from only some groups and doesn't care about turnover in other groups, a
case can be made for having different packages of benefits for different
employee groups. This is an extension of the cost/benefit argument, that
these expenditures, like all others, should clearly bring something of
value to the organization.
The
costs of having different benefit packages for different employee groups
are many. First, this creates a status ladder in the organization in
which there are the haves and the have-nots. This can create morale
problems within the have-not group and tensions between the groups when
they must work together to accomplish organizational goals. Second,
there are administrative problems, such as deciding exactly which job
titles fall into which categories and setting up a number of different
plans. Third, there are external problems with insurance carriers when
only some employees are covered; also there are legal problems with
qualifying programs for tax purposes if only some employees are
involved. Fourth, there are discrimination rules that pertain to some
benefits within the U.S. (self-funded medical plans, cafeteria plans,
dependent, and group life insurance). This latter point may or may not
be valid in that the U.S. IRS rarely appears to enforce these
discrimination rules. HMOs and self-funded medical plans being a primary
example.
Despite
these problems, most organizations have at least two benefits packages,
one for executives and one for all other employees. Many organizations
also pull out other groups for special consideration, such as sales
personnel and technical employees.
The
trend toward using part-time employees rather than full-time employees
is based partly on the cost of benefits. Using part-time employees, the
employer can reduce the legally required benefits somewhat and other
benefits entirely if the organization so wishes. Although this is the
ultimate in different status for different employee groups, many
organizations feel that the cost savings are worth the price.
The
Cafeteria Approach
Different benefit programs for employee groups will be functional to the
employment exchange to the extent that the group as a whole wants the
set of benefits. But as discussed, employee groups are not always a good
indicator of differences in benefit preferences of individuals. The only
effective way to deal with individual variability in benefit preferences
is to have each person decide what benefits to include and how much to
allocate to each. This is called the cafeteria approach. The
employee is assigned a dollar amount of compensation or a set of credits
based on salary, seniority, and age that he or she can divide among a
variety of benefit options; cash is sometimes included as an option.
From
the discussion thus far, the cafeteria approach would seem to be an
ideal approach to maximizing the employment-exchange potential. From the
employee's standpoint needs and preferences can be
accommodated. Further, the employee is making the decisions and so
should be more aware of and committed to the outcome. From the
employer's standpoint there is a clear focus on the total cost of
benefits for each employee. This cost can be more easily controlled by
assigning a dollar amount to each person. There is a potential for tying
rewards more closely to the behavior-membership desired by management.
There
are a number of reasons for the slow acceptance of this concept. The
first is an accounting problem. The payroll is made much more complex
with each person having different deductions. Automated payroll
programs, however, should be able to handle this situation. Second,
insurance carriers develop their programs on the assumption that all
employees will be covered. When all employees do not choose the option,
the cost goes up for those who do choose it. Third, there is
considerable concern about employee decision making.
This
concern runs in opposite directions. On the one hand, there are concerns
that the employee will choose very few benefits and focus on maximum
cash, which will cause them regret if they become sick. Also there are
some benefits, especially the retirement plan, that people must invest
in long before they are likely to perceive the benefit of it. On the
other hand, there is a concern that employees may choose too many
benefits and thereby distort the membership rewards vis-à-vis the job
and performance rewards.
There
is also a concern that unions will not accept the concept of the
cafeteria approach, and that leaves the technique to nonunion
organizations or to the nonunion sector of the organization. This
concern appears to be based upon the feeling that unions try to have
everyone treated alike.
Last,
there is the concern with Government reporting. Cafeteria plans sponsors
are required to file annual Form 5500 reports with the IRS/DOL; to not
do so, results in penalties of $10,000 and $30,000 over multiple
instances, with penalties and interest. Often overlooked for what is a
payroll system issue, these plans require more reporting and expense in
their administration than they create in good will or benefit to
employees.
A
compromise position of the cafeteria approach is to develop a number of
optional benefit programs and allow the employee to choose the one that
best fits his or her needs. These options could be developed through a
survey method, as described earlier. One author suggests that a number
of packages be developed that follow what he calls the stages-of-man
approach: each package would fit a person's situation for a
five-year period. Each program would be equal in overall cost but differ
in its coverage for each benefit. Concerns
for protection from insecurity could be taken care of in this
alternative by building these benefits into all packages.
UNINTENDED EFFECTS OF
ORGANIZATIONAL BENEFITS
In any planning process, it is useful to look as broadly as possible
at the effects of the decisions being made. This section briefly
examines some of the issues that face employing organizations, unions,
the economy, and society because of the method we have chosen to solve
the problem of employee insecurity in this country.
Organizational Effects
Americans have chosen to solve the problems of insecurity arising from
an industrial society very largely by private means. This protection
varies by industry and area as well as by organization size and
unionization. Thus, employees of large, unionized organizations in
metropolitan areas are well protected from insecurity and receive a
large amount of leisure both on and off the job. On the other hand,
employees of small, nonunion organizations may have only the limited
protection provided by social legislation. Employees of many small
organizations are not even covered by social legislation. This range
between the haves and the have-nots grows wider with the growth of
benefits, which shows no signs of abating.
A
continuing disparity of this kind is an invitation to create public
programs to redress the inequality. The development of such programs
brings into question how these required benefits are perceived by the
employee. If, as Allen suggests, benefits that are required of the
organization become social responsibilities and are thereby taken out of
the employment exchange, the organization may lose a reward that
constitutes a large percentage of the total compensation program.
Benefits have a very definite place in the motivational scheme of the
organization. They are a major motivator of continuing membership, but
are not as useful for other purposes. This is an effect of the way they
are administered, being available on the basis of being employed and/or
length of service. Organizations may be wise to keep it this way. Making
different motivational connections would be difficult and place the
organization in the position of doing things that their employees
perceive as illegitimate. Furthermore, it may be functional to clearly
delineate these rewards for membership so that the employee knows why
certain rewards are being offered. But all this is predicated on
employees seeing these rewards as relevant to them; otherwise the
benefit does not enter the employment exchange at all.
Benefit
programs greatly increase the responsibility of employing
organizations. Underlying membership rewards is the assumption that the
organization desires long-term employment and will provide it. This
commitment can reduce the ability of the organization to adapt to
changing circumstances. In addition, with the constant increase in
benefits, the organization must be even more careful that additional
employees are worth hiring. As pointed out, there is now a trend toward
using part-time and temporary employees because the commitment to
full-time employees is so great; this is creating a new group of
organizational have-nots.
Union Effects
Benefit program decisions also increase the responsibilities of
unions. With each additional benefit, union responsibility for ensuring
value to members would seem to increase along with the difficulties of
carrying out this responsibility. The same type of benefit analysis and
expertise discussed earlier for organizations is probably required in
unions as well. Also, although the political nature of unionism may
explain obtaining benefits that some members may not need, it does not
remove the moral issue. Furthermore, the tendency for unions to demand
benefits obtained by other unions has resulted in benefits crossing
industry lines, perhaps destroying economically justifiable
differentials. More serious for unions in partially unionized
industries, the larger benefit programs in unionized firms appear to
have intensified union-nonunion competition to the disadvantage of the
unionized organization. In the past few years this has taken on an
international scope, as American firms are having trouble competing with
foreign companies.
Economic and Social Effects
Benefit decisions of employers and unions may have unintended
consequences for our economy. Our method of providing benefits by
private means may have reduced our ability to compete in foreign
markets. Although other industrialized nations have equal or higher
benefits, their cost incidence is quite different. It can be argued that
these benefits are social costs, paid in their entirety by the worker,
regardless of how they are provided, but the effect on the employer's
labor costs is quite different. In the U.S., benefits are provided
through employment and these costs appear in employer labor costs. In
many other countries, benefits are largely provided by employee
contribution and general tax revenue and thus do not appear in the
employer's labor costs. Also, there appears to be a more selective
approach to granting benefits only to those who need them rather than
the more general approach taken in the United States. For both of these
reasons our competitiveness may be decreasing.
Benefit
decisions can also harm price stability. When total compensation gains
exceed productivity gains in the economy, inflation is the consequence.
Benefit costs are often not given their full weight in calculating total
compensation and so amount to a hidden inflationary tendency.
Benefit
decisions may have three different effects upon employment. The first
is to encourage organizations to work employees overtime, since this
does not significantly change the other benefit costs. The effect of
this, of course, is to lower the employment level. The second effect is
to encourage organizations to hire part-time and temporary employees to
whom the organization does not have to pay these expensive
benefits. Beginning in the mid 1990s, �outsourcing� gained strength in
America as companies employed the employees of other firms (staffing
companies) to complete assignments. It is estimated that within the U.S.
in the Year 2000, almost 24% of American workers were temporary,
outsourced, part-time, or on contracts that could be immediately
terminated. With the shift in the U.S. to a service economy from an
industrial one, a long-term view could be quite discomforting. If it
takes 25 minutes to lay off 24% of U.S. workers and 25 days to pay their
residual pay, the U.S. could be 25 days away from 25% unemployment.
Another
area in which there is a great deal of potential impact on benefit
decisions is labor mobility. Although logic and some studies suggest
that benefits are among the factors that tie people to organizations,
it has not been shown conclusively that retirement plans do so. The
most accurate statement is that organizations need a well-devised
communications program both to inform employees of what their benefits
are and to persuade them that they are valuable rewards. There is the
probability that benefits are one of a number of factors in the
employment exchange that tie people to organizations.
It may be worth
examining whether
protections from insecurity provided through employment have weakened
community efforts to provide group protection. In order to be protected
one must be employed, but it is when one is not employed that there is
the greatest need. Also when those not covered are those not employed,
they represent a group whose cost to cover is much higher than the
average.
ADMINISTRATION OF
BENEFITS
Benefit administrators do more than plan what benefits to offer and to
whom. They must take care of the benefit package that is in effect. This
administrative task consists of processing claims related to the
benefits, communicating the benefit package to the employees, and
monitoring the changing environment of benefits.
Processing Claims
Employees ordinarily have to request that benefits be invoked, and it is
up to the organization or others, such as insurance companies, to decide
if the request is legitimate. That is, someone has to determine if the
act that is claimed has occurred, if the employee is covered for this
act, and if so what payment is appropriate. This work can be
time-consuming but does not necessarily require highly technical skill
to perform. The knowledge of a number of different areas, particularly
insurance, is the main concern in this task. Counseling employees who
have been turned down for a claim and showing them why they did not
qualify requires good interpersonal skills.
This is
one area in which a benefits administrator can show his or her worth to
the organization in concrete terms. Proper claims processing and
monitoring can save up to 15 percent in benefit costs.
Communication of Benefits
The
employment-exchange model points out that to be considered rewards,
benefits must be recognized and perceived as relevant by the
employee. The experience of many organizations is that employees are
unaware of what benefits the organization offers and not at all aware of
the cost of these benefits, even after extensive efforts have been made
to inform them. Further, although it can
be said that employees certainly value benefits,
it is not clear that they desire the particular set of benefits that the
organization offers.
Communicating benefits is harder than communicating wage
information. Each payday the employee receives feedback regarding
wages. But benefits may or may not be visible to the employee over a
long time period. Retirement plans are a good example. To a young person
this is something rarely thought about or discussed, so the chances are
slight that he or she is aware of the organization's retirement plan
program. Further, there is little perceived relevance of a retirement
plan to young people; retirement is the least of their concerns. To
complicate matters, many benefits are difficult to explain and
retirement plans are among the worst. The technical language of
insurance and retirement plans makes it difficult for employees to
understand what they are entitled to, even if they show an interest.
Communicating benefit information takes a planned and continuous
approach if employees are to know and understand their benefit
package. Some ideas that organizations use are as follows:
-
Utilize the Internet for benefits
communications.
-
Utilize the Internet for benefits administration.
-
Make
a benefits presentation to all employees in small groups. This can be
accomplished by using outside resources such as a benefits expert
(consultant or broker) or the supervisor supported by the expert.
-
Have
a counseling line and/or hotline for individual questions.
Monitoring Benefits
The field of benefits is changing rapidly. It is necessary for the
organization to keep careful track of what is happening both externally
and internally. The needs and preferences of employees are likely to
change because the organization's work force is constantly
changing. Surveying employee needs and preferences should be a
continuing exercise and not a one-time project. The practices of
competition in the labor market need to be monitored on the same basis
as they do for wage information. But what has become most complex for
the organization to monitor is the changing costs of those benefits
provided by outside organizations such as insurance
companies. Organizations that have been monitoring what has happened in
this area have begun to develop alternative ways of providing these
benefits to employees at a lower or stable cost. Last, legislation in
this field is changing every day, and administrators need to examine
these acts to see if the organization is meeting legal requirements and
taking proper advantage of changes in the law.
