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Chapter

12Indirect Compensation: Employee Benefit Plans


Strategic Considerations in the Design of Strategic Considerations in the Design of Benefits ProgramsBenefits Programs

The organization’s stage of development Projected rate of employment, growth, or downsizing Geographic redeployment Acquisitions Expected changes in profitability Each of these conditions suggests a change in the optimum “mix”

of benefits to be consistent with long-term business plans


Classifying BenefitsClassifying Benefits

Three broad categories exist for classifying benefits Security and health Payments for time not worked Employee services


Security & Health BenefitsSecurity & Health Benefits

Life Insurance Workers’ compensation Disability Insurance Hospitalization, surgical, and maternity coverage Health maintenance organizations (HMOs) Other medical coverage (dental, mental health, substance abuse) Sick leave Pension plans Social Security Unemployment insurance & supplemental unemployment insurance Severance pay


Payments for Time Not WorkedPayments for Time Not Worked

Vacations Holidays Reporting Time Personal excused absences Grievances and negotiations Sabbatical leaves


Employee ServicesEmployee Services

Employee Services – a broad range of benefits that employees qualify for purely by virtue of their membership in the organization, and not because of merit Some examples include tuition aid, credit unions, auto insurance,

company car, food service, stock-purchase plans, parking, fitness and wellness programs


Gaining Control Over the Cost of Gaining Control Over the Cost of Health CareHealth Care

Band together with other companies to form a ‘purchasing coalition’ to negotiate better rates with insurers

Deal with hospitals and insurers as with any other suppliers Induce employees to choose reduced medical coverage voluntarily

through flexible-benefits plans Negotiate directly with doctors Require pre-admission certification


Cafeteria, or Flexible, BenefitsCafeteria, or Flexible, Benefits

Cafeteria Benefits – instead of all workers at a company getting the same benefits, each worker can pick and choose among alternative options “cafeteria style” Workers are offered a package of benefits that include ‘basic’ and

‘optional’ items


Basic and Flexible ‘Credits’ in the Basic and Flexible ‘Credits’ in the Cafeteria Benefits PlanCafeteria Benefits Plan

Basic modest medical coverage life insurance equal to a year’s salary vacation time based on length of service some retirement pay

Flexible ‘credits’ toward additional benefits Full medical coverage Dental and eye care More vacation time Additional disability income Higher company payments to the retirement fund


Employer Advantages in Employer Advantages in Offering Cafeteria BenefitsOffering Cafeteria Benefits

Under conventional plans, employers risk alienating employees if they cut benefits, regardless of increases in the costs of coverage

Flexible plans allow employers to pass some of the increases on to workers more easily Instead of providing employees a set package of benefits, the employer

and employee agree on a set amount of the employee’s salary to be used toward benefits

If the employee wants more, he/she pays


Communicating Benefits to EmployeesCommunicating Benefits to Employees

Make employees aware of them Help employees understand the benefits information they receive in

order to take full advantage of the plans Make employees confident that they can trust the information they

receive Convince present and future employees of the worth or value of the

benefits package


Communicating the Value Communicating the Value of Benefits Programs to Employeesof Benefits Programs to Employees

Alternative metrics: Annual cost of benefits for all employees Cost per employee per year Percentage of payroll Cents per hour

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