PART FOUR COMPENSATION
C H A P T E R T T h i r t e e n
Benefits And Services 13
Lecture Outline Strategic Overview The Benefits Picture Today Pay for Time Not Worked Unemployment Insurance Vacations and Holidays Sick Leave Parental Leave and the Family and Medical Leave Act Severance Pay Supplemental Unemployment Benefits Insurance Benefits In Brief: This chapter discusses the Workers’ Compensation Hospitalization, Health, and Disability Insurance different benefits and services that Life Insurance companies might offer to employees. Benefits for Part-Time and Contingent Workers These benefits and services are Retirement Benefits offered to entice employees, retain Social Security employees, and to help make them Pension Plans more productive during their service. Pension Planning Pensions and the Law Pension Alternatives Interesting Issues: More and more Personal Services and Family-Friendly Benefits companies are moving to flexible Personal Services benefits packages. Students might Family-Friendly Benefits well be prodded to understand the Executive Perquisites dynamics driving this, as well as the Flexible Benefits Programs costs and benefits to the employer. The Cafeteria Approach Computers and Benefits Administration Flexible Work Arrangements
ANNOTATED OUTLINE
213 I. The Benefits Picture Today – Benefits can be classified by 1) pay for time not worked; 2) insurance benefits; 3) retirement benefits; and 4) services.
Know Your Employment Law: Benefits – There are a myriad of laws that affect benefits. It is important that expert assistance be secured when formulating benefits and benefits policies.
II. Pay for Time Not Worked
A. Unemployment Insurance – All states have unemployment insurance or compensation acts (that follow federal guidelines), which provide for weekly benefits if a person is unable to work through some fault other than his/her own. The benefits derive from an unemployment tax on employers that can range from 0.1% to 5% of taxable payroll in most states. An employer’s unemployment tax rate reflects its rate of personnel terminations.
B. Vacations and Holidays – The number of paid employee vacation days and holidays varies considerably from employer to employer. Firms have to address several holiday- and vacation-related policy issues.
C. Sick Leave – provides pay to employees when they’re out of work due to illness. Most sick leave policies grant full pay for a specified number of permissible sick days. To minimize employees using their sick leave as extensions to their vacations, some employers are repurchasing unused sick leave at the end of the year by paying their employees a daily equivalent sum for each sick leave day not used or creating a leave bank or paid time off (PTO).
D. Parental Leave and the Family Medical Leave Act –stipulates that: 1) private employers of 50 or more employees must provide eligible employees up to 12 weeks of unpaid leave for their own serious illness, the birth or adoption of a child, or the care of a seriously ill child, spouse, or parent; 2) employers may require employees to take any unused paid sick leave as part of the 12-week leave provided in the law; 3) employees taking leave are entitled to receive health benefits while they are on unpaid leave, and 4) employers must guarantee employees the right to return to their previous or equivalent position with no loss of benefits at the end of the leave; however, the law provides a limited exception from this provision.
E. Severance Pay – a one-time payment when terminating an employee, is a humanitarian gesture, and good public relations. Most managers expect employees to give them at least one or two weeks’ notice if they plan to quit; it therefore seems appropriate to provide at least one or two weeks’ severance if an employee is being dismissed.
F. Supplemental Unemployment Benefits – supplement the employee’s unemployment compensation, and help the person maintain his/her standard of living for a time while he/she is out of work due to layoffs, reduced workweeks, and relocations. They are becoming more prevalent in union agreements.
Ø NOTES Educational Materials to Use
III. Insurance Benefits
214 A. Workers’ Compensation – refers to the sure, prompt income and medical benefits provided in work-related accidents to the victims or their dependents, regardless of fault. Every state has its own worker’s compensation law and administrative commission, and some run their own insurance programs. Most states require employers to carry worker’s compensation insurance. Neither the state nor the federal government contributes any funds for worker’s compensation.
1. How Benefits are Determined – Workers’ Compensation can be monetary or medical. Monetary awards are based on a formula regarding the disability involved and the worker’s average weekly wages. Some disabilities or losses also receive monetary awards based on a schedule of those losses.
2. Controlling Worker’s Compensation Costs – The costs of insurance premiums depend on the number and dollar amount of claims, thus minimizing such claims is important. Some ways to reduce such claims is to screen out accident-prone workers; reduce accident-causing conditions in your facilities; and institute effective safety and health programs, and comply with government standards on these matters. Many firms institute rehabilitation programs to get injured employees back on the job as fast as possible, since worker compensation cost accumulate as long as the person is out of work.
B. Hospitalization, Medical, and Disability Insurance – is aimed at providing protection against hospitalization costs and loss of income arising from accidents or illness occurring from off-the-job causes, and is offered by most employers because medical care and insurance are so expensive. Employer health and hospitalization plans must comply with the Americans with Disabilities Act. Accidental death and dismemberment coverage provides a lump-sum benefit in addition to life insurance benefits when death is accidental. Disability insurance provides income protection for loss of salary due to illness or accident. A health maintenance organization (HMO) is a medical organization consisting of several specialists operating out of a community-based health care center. Preferred provider organizations (PPOs), a cross between HMOs and the traditional doctor/patient arrangement, are groups of health care providers that contract to provide medical care services at a reduced fee.
1. New Trends in Health Care Cost Control – many employers are changing their medical plans by: 1) moving away from 100% medical cost payments and including a deductible; 2) increase annual deductibles; 3) require medical contributions; 4) use gatekeepers; 5) encourage preventive health care; 6) form health care coalitions; and 7) manage the cost of aids.
2. Mental Health Benefits – The costs of mental health treatment are rising because of widespread drug and alcohol problems. There is an increase in the number of states requiring employers to offer a minimum package of mental health benefits. The Mental Health Parity Act of 1996 sets minimum mental health care benefits at the national level.
3. The Pregnancy Discrimination Act – (PDA) prohibits sex discrimination based on pregnancy, childbirth, or related medical conditions, thus employers must treat women affected by pregnancy, childbirth, or related medical conditions the same as any employee not able to work, with respect to all benefits, including sick leave and disability benefits, and health and medical insurance.
215 4. COBRA – (Comprehensive Omnibus Budget Reconciliation Act) requirements are that most private employers must make continued health benefits available to terminated or retired employees and their families for a period of time, generally 18 months. The former employee must pay for the coverage, if desired, as well as a small fee for administrative costs.
5. Long-Term Care – is a new benefit aimed at supporting people in their old age. The Health Insurance Portability and Accountability Act, enacted in 1996, lets employers and employees deduct the cost of long-term care insurance premiums from their annual income taxes.
C. Life Insurance – Most employers provide group life insurance plans, which usually accept all employees, regardless of health or physical condition.
D. Benefits for Part-time and Contingent Workers – Some firms provide holiday, sick leave, vacation benefits, and some form of health care benefits for employees who work less than 35 hours a week.
Ø NOTES Educational Materials to Use
IV. Retirement Benefits
A. Social Security – provides three types of benefits: retirement benefits, survivor’s (death) benefits, and disability payments. Retirement benefits provide an income if you retire at age 62 or thereafter and are insured under the Social Security Act. Survivor (death) benefits provide monthly payments to your dependents regardless of your age at death if you were insured under the Social Security Act. Disability payments provide monthly payments to employees who become totally disabled (and their dependents) if they work and meet certain specified work requirements. The Social Security system also administers the Medicare program, which provides a wide range of health services to people 65 or older.
B. Pension Plans – There are a variety of pension plans. Defined contribution plans specify what contributions the employer will make to the employee’s retirement or savings fund. 401 (k) plans are where an employee authorizes the employer to deduct a certain amount of money from his/her paycheck before taxes and to invest in the 401(k) plan. Many federal laws govern pensions. Employers have to consider several policy issues in developing pension plans: membership requirement; benefit formula; plan-funding; and vesting.
1. 401(k) Plans – a popular defined contribution plan in which the employee can have money deducted from his or her paycheck and deposited in the account before payroll taxes.
2. Other Types of Defined Contribution Plans – in a savings a thrift plan, employees contribute a portion of their earnings to a fund. The employer usually matches this contribution in whole or in part. In deferred profit sharing plans, employers contribute a portion of their profits to the pension fund. An employee stock ownership plan (ESOP) is a tax-deductible stock bonus plan.
216 C. Pension Planning – The Employee Retirement Income Security Act Income Security Act (ERISA) restricts what companies can, cannot, and must do in regards to pension plans. In developing pension plans, employers must consider: membership requirements, benefit formula, plan funding, and vesting.
D. Pensions and the Law – Under the Employee Retirement Income Security Act (ERISA), participants in pension plans must have a non-forfeitable right to 100% of their accrued benefits after 3, 5, or 7 years of service. Under the Tax Reform Act of 1986, an employer can require that an employee complete a period of no more than 2 years’ service to the company before becoming eligible to participate in the plan. If you require more than 1 year of service before eligibility, the plan must grant employees full and immediate vesting rights at the end of that period.
E. Pension Alternatives
1. Early Retirement Windows – mean that the company opens up (for a limited time only) the opportunity for employees to retire earlier than usual, with a financial incentive, which is generally a combination of improved or liberalized pension benefits plus a cash payment.
2. Portability – of pension plans refers to making it easier for employees to take their retirement income when they leave, and roll it over into a new employer’s savings plan by switching from defined benefit to defined contribution plans.
3. Cash Balance Pension Plans – are defined benefit plans under which the employer contributes a percentage of employees’ current pay to the employees’ pension plans every year, and employees earn interest on this amount.
Improving Productivity Through HRIS: Benefits Management Systems – Benefits administration can be an enormously labor- intensive and time consuming activity for an HR department. One of the main ways HR managers are increasing the productivity of their benefits dollars is by increasing the utilization of technology.
Ø NOTES Educational Materials to Use
V. Personal Services and Family-Friendly Benefits
A. Personal Services – are being provided by many companies.
1. Credit Unions – are usually separate businesses established with the employer’s assistance to help employees with their borrowing and saving needs.
2. Employee Assistance Programs – (EAPs) provide employees with counseling and/or treatment for problems such as alcoholism, gambling, or stress.
B. Family-Friendly Benefits – There are more families in which both adults work, more one-parent households, more women working, and more people over 55
217 working. On-site child care, fitness and medical facilities, flexible work scheduling, telecommuting, occasional sabbaticals, loan programs for home computers, stock options, concierge services, even insurance for the family pet are all part of the compensation package in the new workplace.
1. Effects on Performance – There is not a lot of evidence to suggest that family-friendly benefits improve productivity. Many firms implement them as part of broader commitment-building programs.
2. Subsidized Child Care – is an increasingly desirable benefit, which tend to improve recruiting results, lower absenteeism, improve morale, garner favorable publicity, and lower turnover.
3. Elder Care – programs are being offered to employers to help employees who must care for elderly who can’t fully care for themselves.
4. Other Job-Related Benefits – employers provide include subsidized employee transportation, food services, and educational subsides.
5. September 11 – this terrorist attack had two effects: 1) many firms expanded their trauma counseling services, and 2) insurance became much more expensive to obtain.
The New Workplace: Domestic Partner Benefits – Many companies are extending benefits coverage to same sex domestic partners. Because IRS guidelines do not include such partners in the definition of “dependents,” there is considerable doubt that these benefits will be tax free.
C. Executive Perquisites – (perks, for short) include management loans, salary guarantees, protection for executives if their firms become targets of acquisitions or mergers, financial counseling, relocation benefits, time off with pay, outplacement assistance, company cars, chauffeured limousines, security systems, company planes and yachts, executive dining rooms, physical fitness programs, legal services, tax assistance, liberal expense accounts, club memberships, season tickets, credit cards, and children’s education.
Ø NOTES Educational Materials to Use
VI. Flexible Benefits Programs – When given the opportunity to choose, employees do prefer flexibility in their benefits plan.
A. The Cafeteria Approach – (cafeteria benefits plan is generally synonymous with flexible benefits plan) is where each employee is given a benefits fund budget to spend on whichever benefits he/she wants once the employer limits the total cost for each benefits package and includes certain non-optional items. Flexible spending accounts let employees pay for certain benefits expenses with pretax dollars. Core plus option plans establish a core set of benefits, which are usually mandatory for all employees; then the employees can choose from various benefits options. The HR Scorecard, Strategy and Results: The New Benefits Plan – The Hotel Paris implements a new family- friendly benefits plan. Its centerpiece was a proposal for dramatically improved family-
218 friendly benefits. Because so many of each hotel’s employees were single parents, and because each hotel had to run 24 hours a day, they set aside a room in each hotel for an on-site child-care facility.
B. Computers and Benefits Administration – Computes, including PC-based systems and the Internet, enable employees to update and manipulate their benefits packages.
C. Flexible Work Arrangements
1. Flextime – is an arrangement by which employees have flexibility in scheduling their workday around core hours.
2. Compressed Workweeks – may consist of four 10-hour days, three 12-hour days, or other such combinations.
3. Effectiveness of Flextime and Compressed Workweek Programs – reviews indicated that they increase employee satisfaction and productivity. Some critics are concerned that fatigue and accidents may increase.
4. Other Flexible Work Arrangements – there are many other arrangements that employers may offer. Job sharing is when two people share one full-time job. Work sharing is when a whole group reduces its hours to prevent layoffs. Telecommuters work at home and use phones and internet to conduct business.
When You’re On Your Own, HR for Line Managers and Entrepreneurs: Benefits and Employee Leasing – First Weigh Manufacturing, a 40-employee firm, signed up with ADP Total Source to enable its employees to receive employee benefits and HR services as if they worked for a large firm. Employee leasing firms are assisting smaller firms to handle their employee-related activities.
Ø NOTES Educational Materials to Use
DISCUSSION QUESTIONS
1. You are applying for a job as a manager and are at the point of negotiating salary and benefits. What questions would you ask your prospective employer concerning benefits? Describe the benefits package you would try to negotiate for yourself. You should ask sufficient questions about all aspects of the benefits package such that you will come away knowing exactly what benefits you will and will not have. These can be phrased in many ways, but should cover all areas important to the potential employee. Hopefully, students will be far-sighted enough to understand the importance of benefits that might not appear to be critical at this stage of their lives. For example, if students are young and single, they should realize the importance of a good family medical plan as well as a well-funded retirement plan.
2. What is unemployment insurance? Is an organization required to pay unemployment benefits to all dismissed employees? Explain how you would go about minimizing your organization's unemployment insurance tax. Unemployment insurance provides benefits to an individual who is
219 unable to work through some fault other than his/her own. An organization is not required to pay unemployment benefits to all dismissed employees. You could minimize your organization’s unemployment insurance tax by making sure that all your managers understand the unemployment insurance code, train managers and supervisors on discipline and discharge, conduct exit interviews, verify employment claims, file the protest against a former employee's claim on a timely basis, know your local unemployment insurance official, and audit the annual benefit charges statement.
3. Explain how ERISA protects employees’ pension rights. Under ERISA, pension rights must be vested under one of three formulas. Also, ERISA established the Pension Benefits Guarantee Corporation to help ensure that pensions meet vesting obligations; the PBGC also insures pensions should a plan terminate without sufficient funds to meet its vested obligations.
4. What is "portability"? Why do you think it is (or isn't) important to a recent college graduate? Portability is the ability of an employee to take his or her retirement income when they leave an organization and roll it over into a new employer's savings plan or IRA. Today's college graduate may not think about it, but it is important to consider the question of portability. Most college graduates can expect to change employers several times during their career. Having portable retirement plans can help ensure that they end up with a reasonable retirement income. If the plans are not portable, it will take exceptional planning on the employee's part to ensure adequate retirement income.
5. What are the provisions of the FMLA? The FMLA provides the following: 1) private employers of 50 or more employees must provide eligible employees up to 12 weeks of unpaid leave for their own serious illness, the birth or adoption of a child, or the care of a seriously ill child, spouse, or parent; 2) employers may require employees to take any unused paid sick leave or annual leaves as part of the 12-week leave provided in the law; 3) employees taking leaves are entitled to receive health benefits while they are on unpaid leave, under the same terms and conditions as when they were on the job; 4) employers must guarantee employees the right to return to their previous or equivalent position with no loss of benefits at the end of the leave; however, the law provides a limited exception from this provision to certain highly paid employees.
DESSLER COMPANION WEB SITE We invite you to visit the Dessler homepage (http://www.prenhall.com/dessler) on the Prentice Hall Web site for the best online business support available. This site provides professors with a customized course Web site, including new communication tools, one-click navigation of chapter content, and great resources, such as Internet Resources, an HRCI Exam Prep Guide, assessment exercises, and more.
INDIVIDUAL AND GROUP ACTIVITIES
1. Working individually or in groups, find out the unemployment rate and laws of your state. Write a summary detailing your state’s unemployment laws. Assuming Company X has a 30% rate of personnel terminations, calculate Company X’s unemployment tax rate in your state. Suggest that the students use the Internet to research the unemployment rate and laws for your state.
2. Assume you run a small business. Working individually or in groups, visit the Web site www.dol.gov/elaws. Write a two-page summary explaining: (1) the various retirement savings programs available to small-business employers, and (2) which retirement savings program you would choose for your small business and why. Based on what they learned from the
220 chapter and the results of their Internet search, the students should include at a minimum a 401(k) plan that can be assessed online.
3. You are the HR consultant to a small business with about 40 employees. At the present time the firm offers only five days vacation, five paid holidays, and legally mandated benefits such as unemployment insurance payments. Develop a list of other benefits you believe they should offer, along with your reasons for suggesting them. The specific ones to recommend would depend partly on the profile of the employees of the firm. In the absence of that information, the least costly addition of benefits would be to add some sick leave (or personal days) and consider additional vacation and/or holidays. The next benefit that they might look to would be to add the availability of some kind of health plan that could include a contributory cost to the employee. This would be less expensive to the company and add real value to the employees because of group discounts.
4. The HRCI “Test Specifications” appendix at the end of this book (pages 685-692) lists the knowledge someone studying for the HRCI certification exam needs to have in each area of human resource management (such as in Strategic Management, Workforce Planning, and Human Resource Development). In groups of four to five students, do four things: (1) review that appendix now; (2) identify the material in this chapter that relates to the required knowledge the appendix lists; (3) write four multiple choice exam questions on this material that you believe would be suitable for inclusion in the HRCI exam; and (4) if time permits, have someone from your team post your team’s questions in front of the class, so the students in other teams can take each others’ exam questions. The material in this chapter that relates to the HRCI certification exam includes: unemployment insurance, vacations and holidays, sick leave, parental leave and FMLA, severance pay, supplemental unemployment benefits, workers’ compensation, hospitalization, health, and disability insurance, life insurance, benefits for part-time workers, social security, pension plans, pension planning, pensions and the law, pension trends, executive perquisites, and flexible benefits programs. Multiple choice questions should reflect material in this chapter and should have answer choices which could appear plausible.
EXPERIENTIAL EXERCISES & CASES Experiential Exercise: Revising the Benefits Package
Students are given a scenario of a small business and its benefits package. Students are to devise a benefits package “in keeping with the size and requirements for this firm.” This means that they need to carefully balance the costs and the administration requirements with the resources that the small firm has.
Application Case: Striking for Benefits
1. Assume you are mediating this dispute. Discuss five creative solutions you would suggest for how the grocers could reduce the health insurance benefits and the cost of their total benefits package without making any employees pay more. It is suggested that you consider giving this exercise as a group assignment. Finding five creative solutions will be challenging, but things that should be considered include: altering deductibles but providing grandfathered employees extra pay to compensate; altering the pay schedule by increasing the pay for existing employees to compensate for additional health care costs passed on to them, but new employees not getting that pay increase; etc. 2. From the grocery chains’ point of view, what is the downside of having two classes of employees, one of which has superior health insurance benefits? How would you suggest they handle the problem? Morale is a critical problem. Anytime there are two classes, jealousy and resentment increase and morale decreases. Also, administration costs increase. Some of the suggestions in question #1 might avoid the two classes.
221 3. Similarly, from the point of view of the union, what are the downsides of having to represent two classes of employees, and how would you suggest handling the situation? The “lower class” employees will feel that they were “sold out” by the union and may loose faith in the value of the union. Initially the union will be safe because of the larger number of employees in the “better” group, but eventually that will change.
Continuing Case: Carter Cleaning Company The New Benefits Plan
1. Draw up a policy statement regarding vacations, sick leave, and paid days off for Carter Cleaning Centers. The students are likely to create different policy statements, which will reflect their different preferences for benefits. You should get the students to discuss how LearnInMotion.com might allow for flexibility in their pay for time not worked.
2. What would you tell Jennifer are the advantages and disadvantages to Carter Cleaning Centers of providing its employees with health, hospitalization, and life insurance programs? The student should refer to the hospitalization, medical, and disability insurance section of the chapter to develop their lists of advantages and disadvantages.
3. Would you advise establishing some type of day care center for the Carter cleaning employees? Why or why not? A better approach for a small company such as Carter would be to locate a licensed day care provider that would be willing to give a discount to Carter employees. From that starting point, she could then consider whether to subsidize childcare.
PART-ENDING VIDEO CASE Compensation Angelo Hernandez, a recruiter for Focus Pointe, is dissatisfied with his incentive plan. He feels his current plan, which is based on the quantity of recruits he brings to the company, does not fairly reward him for his efforts. Angelo speaks with Chona Castillo in the HR department about reevaluating his incentive plan, and exploring other forms of compensation. This segment discusses how and when incentive plans are best used, as well as alternative methods of compensation: benefits, services, rewards, etc.
For full video case and discussion questions, please visit the Faculty Resource section of the Dessler Companion Web Site at: http://www.prenhall.com/dessler
KEY TERMS benefits Indirect financial and nonfinancial payments employees receive for continuing their employment with the company. supplemental pay Benefits for time not worked such as unemployment insurance, vacation, benefits and holiday pay and sick pay. unemployment Provides benefits if a person is unable to work through some fault other insurance than his or her own. sick leave Provides pay to an employee when he or she is out of work because of illness.
222 severance pay A one-time payment some employers provide when terminating an employee. supplemental Provide for a guaranteed annual income in certain industries where unemployment benefits employers must shut down to change machinery or due to reduced work. These benefits are paid by the company and supplement unemployment benefits. worker's compensation Provides income and medical benefits to work-related accident victims or their dependents regardless of fault. health maintenance A prepaid health care system that generally provides routine round-the- organization (HMO) clock medical services as well as preventative medicine in a clinic-type arrangement for employees, who pay a nominal fee in addition to the fixed annual fee the employer pays. preferred provider Groups of health care providers that contract with employers insurance organization (PPO) companies, or third-party payers to provide medical care services at a reduced fee. group life insurance Provides lower rates for the employer or employee and includes all employees, including new employees, regardless of health or physical condition.
Social Security Federal program that provides three types of benefits: retirement income at age 62 and thereafter; survivor's or death benefits payable to the employee's dependents regardless of age at time of death; and disability benefits payable to disabled employees and their dependents. These benefits are payable only if the employee is insured under the Social Security Act. pension plans Plans that provide a fixed sum when employees reach a predetermined retirement age or when they can no longer work due to disability. defined benefit A plan that contains a formula for determining retirement benefits. pension plan defined contribution A plan in which the employer's contribution to employee's retirement or plan savings funds is specified.
401(k) plan A defined contribution plan based on section 401(k) of the Internal Revenue Code. savings and thrift plan Plan where employees contribute a portion of their earnings to a fund; the employer usually matches this contribution in whole or in part. deferred profit-sharing A plan in which a certain amount of profits is credited to each employee’s plan account, payable at retirement, termination, or death. employee stock A qualified, tax-deductible stock bonus plan in which employers ownership plan (ESOP) contribute stock to a trust for eventual use by employees.
Employee Retirement Signed into law by President Ford in 1974 to require that pension rights Income Security Act be vested, and protected by a government agency, the PBGC. (ERISA)
223 vesting Provision that money placed in a pension fund cannot be forfeited for any reason.
Pension Benefits Established under ERISA to ensure that pensions meet vesting Guarantee Corporation obligations; also insures pensions should a plan terminate without (PBGC) sufficient funds to meet its vested obligations. early retirement A type of offering by which employees are encouraged to retire early, the window incentive being liberal pension benefits plus perhaps a cash payment. cash balance plans Defined benefits plans under which the employer contributes a of employees’ current pay to the employees’ pension plans every year, and employees earn interest on this amount. employee assistance A formal employer program for providing employees with counseling and/ program (EAP) or treatment programs for problems such as alcoholism, gambling, or stress. flexible benefits plan / Individualized plans allowed by employers to accommodate employee cafeteria benefits plan preferences for benefits. job sharing Allows two or more people to share a 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 Where employees work at home, usually with computers, and use phones, and the internet to transmit letters, data and completed work to the home office.
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