1. Discretionary Benefits

2. u Protection Programs –In general provide: Family benefits, promote health, guard against income loss –Pension Plans, Income protection, Insurance, etc. u Paid Time Off –Vacation, sick days, etc. u Employee Services –Tuition reimbursement, day care, etc.

3. Income Protection Programs u Pension Programs –Financing method: Contributory vs. non- contributory –Benefit determination: Defined contribution vs. defined benefit –Tax treatment: Qualified vs nonqualified u Disability Insurance –Short term (usually <6mo) 50-100% of pretax salary –Long term (usually 6 mo-life) 50-70% of pretax salary u Life Insurance –Term coverage (during work years) –Whole life coverage –Group plans less expensive

4. Pension Plans u Financing methods: Contributory vs. non-contributory – Contributory = employees contribute – Non-contributory = employer pays all – Employee-financed = employee pays all u Benefit determination: Defined benefit vs. defined contribution – Defined benefit = variable in, fixed out – Defined contribution = fixed in, variable out Profit sharing plans, 401K, ESOPs, savings and thrift plans u Tax Treatment: Qualified vs non qualified – Entitle employers to tax benefits--tax deductions – Employees may get tax benefits when retire—not taxed until retirement

5. Exhibit 11-3 The General Characteristics of Qualified Pension Plans (1 of 2) u Eligibility –Employers may impose any initial eligibility EXCEPT age or service. –Cannot require “minimum age over 21” –Cannot require “more than one year of service” u Nondiscrimination –Cannot provide highly compensated employees (e.g., VPs, CEOs) with preferential treatment with regard to employer contributions or level of level of benefits received –Unless the employer contributions or benefit levels are based solely on employees’ compensation level or years of service.

6. Exhibit 11-3 The General Characteristics of Qualified Pension Plans (2 of 2) u Vesting Requirements –Employers must provide employees with a non-forfeitable right to the funds they contribute to the plans on behalf of their employees after a specified period, commonly five years. –Employees who leave before the five-year period forfeit the right to the funds contributed on their behalf by the employer. u Pay-out Restrictions –Employees generally pay a penalty (usually 10 percent) on withdrawal of funds from any qualified plan before early retirement age (59 1/2 years).

7. Pension Practices by Industry Hewitt & Assoc. 1993

8. Health Protection Programs u Indemnity plans (fee for service plans) –Hospital, surgical, physicians –Usual, customary, and reasonable charge –Deductible –Coinsurance: % of covered insurance that employee pays –Out of pocket maximum u Self-funded –Like indemnity, but Company pays. u Health maintenance organizations (HMOs) –“Prepaid medical services” –Small co-payments –Prepaid group practices or individual practice assoc u Preferred Provider organizations (PPO) –Select group of health care providers –Quality standards, cost-containment, PPOs reimbursement structure –No benefits on prepaid basis –Can choose from comprehensive lists of doctors and facilities

9. Exhibit 11-4 U.S. Health Care Expenditures, 1960 to 1993 (1 of 3) YEAR 1960 1965 1970 1971 1972 1973 1974 1975 1976 PRIVATE TOTAL Source: US Health Care Financing Admin., Health Care Financing Review (Winter 1994); table 150. TOTAL (BILLIONS OF DOLLARS) PER CAPITA (DOLLARS) PRIVATE TOTAL HEALTH SERVICES AND SUPPLIES (BILLIONS OF DOLLARS) 27.1 41.6 74.3 82.2 92.3 102.4 115.9 132.6 151.9 143 204 346 379 421 464 521 591 671 19.8 29.9 44.0 48.1 53.9 59.7 65.9 74.1 85.7 5.7 8.3 25.0 28.2 31.8 35.9 42.8 50.2 56.9

10. Exhibit 11-4 U.S. Health Care Expenditures, 1960 to 1993 (2 of 3) YEAR 1977 1978 1979 1980 1981 1982 1983 1984 1985 PRIVATE TOTAL Source: US Health Care Financing Admin., Health Care Financing Review (Winter 1994); table 150. TOTAL (BILLIONS OF DOLLARS) PER CAPITA (DOLLARS) PRIVATE TOTAL HEALTH SERVICES AND SUPPLIES (BILLIONS OF DOLLARS) 172.6 193.2 218.3 251.1 291.4 328.2 360.8 396.0 434.5 755 836 937 1,068 1,227 1,369 1,490 1,620 1,761 96.6 109.7 124.0 141.3 164.3 186.5 205.3 228.0 252.9 64.7 73.6 84.0 96.1 113.9 126.9 139.5 151.6 165.2

11. Exhibit 11-4 U.S. Health Care Expenditures, 1960 to 1993 (3 of 3) YEAR 1986 1987 1988 1989 1990 1991 1992 1993 PRIVATE TOTAL Source: US Health Care Financing Admin., Health Care Financing Review (Winter 1994); table 150. TOTAL (BILLIONS OF DOLLARS) PER CAPITA (DOLLARS) PRIVATE TOTAL HEALTH SERVICES AND SUPPLIES (BILLIONS OF DOLLARS) 466.0 506.2 562.3 623.9 696.6 755.6 820.3 884.2 1,871 2.013 2,214 2,433 2,686 2,882 3,094 3,299 268.7 291.3 327.5 361.7 399.8 422.8 451.7 484.3 180.4 196.6 213.7 240.1 272.5 206.0 341.2 370.9

12. Other Health Insurances u Dental insurance –Indemnity dental insurance –Self-insured dental plans –Dental service corporations –Dental Maintenance organizations u Vision Insurance –Fewer companies –Eye exams. Lenses, frames, fitting –Indemnity or managed care –Limit frequency and types of services., e.g., once a year –Exclude specialty prescription glasses, contacts.

13. Paid Time Off u Vacation: 97%* u Holidays: 97% u Sick leave: 68% u Personal: 22% u Jury duty: 90% u Funeral: 84% u Military leave: 53% u Clean-up, prep, travel u Rest time, break: 71% u Lunch periods

14. Exhibit 11-6 Pay for Time-Not-Worked Practices in Medium and Large Private Establishments, 1993 BENEFIT Holidays Vacation Personal leave Jury duty Funeral leave Military leave AVERAGE AMOUNT PERCENT OF FULL-TIME EMPLOYEE RECIPIENTS 76 100 62 87 77 53  11 days per year Depends on tenure  3 days per year No stated maximum  3 days per year  10 days per year Source: US Bureau of Labor Statistics, Employee benefits in medium and large private establishments, 1993 (Washington, D.C.: US Government Printing Office, 1994).

15. Vacation by Industry

16. Employee Services u Employee Assistance Programs (EAPs): 49% –To cope with personal problems: drug, alcohol, etc u Family assistance programs –Day care: 5% –Elder care: 3% –Flexible scheduling and leave: compressed work weeks, flextime, job sharing, extended leave u Wellness: 23% –Smoking cessation, stress management, weight control and nutrition u Flexible benefit plans: 9% u Educational assistance: 69% u Transportation services u Outplacement Assistance

17. Work & Family by Industry

18. Flexible Benefit Programs Advantages u Employees unique needs u Changing needs of changing workforce u Increased involvement u Easy to intro new benefits u Cost containment Disadvantages u Employees make bad choices, uncovered u Adverse selection u Admin burdens, expenses increase

19. Others u Personal convenience: on-site laundry, payroll deductions for personal purchases, casual dress code, parking 90%, recreation facilities 28% u Other monetary: severance pay 39%, relocation allowance 36% u Flextime: Core hours, Adjustable hours u Job Security

20. Illustration of Flextime 6am9am noon 3pm6pm Flexible Time Flexible Time (Lunch) Flexible Time CoreTime CoreTime Band Width

21. Benefit Communication u Increase understanding, appreciation u Increase knowledge of costs u Cooperation in controlling costs u Demonstrate respect for employees