Employee Benefits © Nancy Brown Johnson, 2005

Typical Benefits Applied Signal Technology - Employee BenefitsApplied Signal Technology - Employee Benefits

Benefits Are: Driven by tenure & entitlement –Difficult to reward factors such as teamwork Not flexible –Difficult to change to reflect priorities Difficult to use strategically –cannot tailor to fit organizations needs Does not tend to motivate

So why do firms give benefits? Legal Compliance Tend to become Institutionalized & Expected Basic level of Employee Protection Tax advantages Group rate advantages

©a Times Mirror Higher Education Group, Inc., company, 1997 IRWIN Percentage % 30% 20% 10% Benefits Growth Chamber of Commerce Survey Results

Reasons for Growth New Deal legislation Wage and price controls – -WW II Inflationary Benefit Costs

Legally Mandated Benefits Social Security About 8% employer and employee tax on wages Additional Medicaid tax of 1.45% President’s proposal Counter reactions Unemployment Compensation Experienced based tax Eligibility: work 1 year - not on strike, quit or fired for cause Workers Compensation Disability,medical care, death benefit & rehabilitation Experienced based tax Family and Medical Leave Act ©a Times Mirror Higher Education Group, Inc., company, 1997 IRWI N

Benefit Planning Issues What is the role of benefits in compensation? –Attraction, Retention, Motivation –External Competitiveness –Cost control

Private Insurance Health –Cobra must continue –Trend is for employers to shift more of cost to employees Life Short & Long Term Disability Nursing home

Health Care Source: Kaiser Family Medical Foundation, 2002.

Retirement ©a Times Mirror Higher Education Group, Inc., company, 1997 IRWI N Defined Benefit retirement income level is specified employer assumes risk Defined Contribution amount contributed to retirement defined employee assumes risk Retirement confidence survey

Defined Benefit Expected Present Value of Pension Assumes Pension=500*years of service 1. Benefit value=0 if quits, the day starts 2. Benefit value=0 if works until death Value Retirement Age

Defined Contribution Expected Present Value of Pension Expected Pensions do not depend upon number of years left in person’s life Benefits keep growing Value Retirement Age

So What is the Incentive to Retire? Defined benefit plan- –around 67 in the example where the gains to retirement exceed gains to working Defined contribution plans –incentive keeps working How do you encourage workers to retire? –cash by out –defined benefit plan

Vesting Military-no pension until 20 years of service Separations high at beginning but non-existent at years of service, then very high again at 20 years Annual Pension Benefits Years of Service 20

ERISA (1974) funding vesting communication portability-values do not change when employer changes funding vesting communication portability-values do not change when employer changes

©a Times Mirror Higher Education Group, Inc., company, 1997 IRWI N Value of Savings at 65 (Millions of Dollars) $837,434 $357, $128,253 $214,957 It pays to save early and take some risk Investment portfolio (60% stocks, 30% bonds, 10% cash) Investment portfolio of 100% cash(money market ) Value of savings for different portfolios Savings Calculator

Payment for Time Not Worked Vacations –not mandated in US –30 days mandatory in Europe –share in work –Japanese work more hours Holiday Pay Sick Leave: no fault system Family & Medical Leave

Paid Time Off Paid leave makes workers take time that they might not choose to take Option pay higher wages and let the workers decide if they want to work

Why do firms give paid time-off? Banks to find out what is going on? Team production: to get everyone synchronized Rest to be more productive

Source: U.S. Chamber of Commerce Research Center, Employee Benefits 1990 (Washington DC: U.S. Chamber of Commerce, 1991). Annual Hours Japan United States FranceGermany Average Hours Worked in Manufacturing

Employee Benefits in 1993 by Category Source: Adapted from the U.S. Chamber of Commerce Research Center, Employee Benefits (Washington,DC: U.S. Chamber of Commerce), 1991, % Payment for time not worked 28.3% Medical & other insurance 21.1% Legally required 16.0% Retirement plans Paid rest periods (5.6%) Miscellaneous (3.8%) Benefits as % of payroll equals 41.3% Benefits as % of payroll equals 41.3%

Managing Benefits Survey & Benchmarks Cost control –managed care –co-insurance –HMO or PPO Workforce Demographics Communicating with Employees

Wages v. Benefits Value -the amount an individual is willing to pay for a good or service –if price is too high, the worker wouldn’t buy Worker may be willing to pay more for the benefit than it costs (e.g., group rates, taxes) Willingness to trade wages for benefit –Salary = 55, (Health Plan) –Salary with health plan $53,991

Employees Undervalue Benefits Unaware of costs Every benefit does not suit every worker

Flexible Benefit Plans (Cafeteria) Workers get more value Helps make employees more aware of benefit costs Addresses different employees needs Maybe reduce some costs for benefits not needed Increased design and administrative costs

Benefits & Sorting The benefit package signals the type of worker –life insurance-older worker –day care - family oriented worker –tuition - worker willing to get education Cafeteria Plan –weaker signal Adverse Selection –health insurance would attract sicker families –these people apt to be less productive

Social Traps Some benefits may hurt people intend to help Examples: Work/family benefits Help to recruit women with families May hurt women’s career paths Insurance May not hire sicker employees Drive up insurance costs

Benefits Can be Made More Effective Cost sharing Aggressive Cost Management Engaging Employees in Benefit Choices Target specific benefits to make workforce more productive –childcare, wellness, employee assistance

Benefit Summary Benefits usually do not motivate Usually viewed as entitlement Benefits may help attraction and retention Often undervalued by employees Communication important in the process