McGraw-Hill/IrwinMcGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Milkovich/Newman: Compensation, Ninth EditionMilkovich/Newman: Compensation, Ninth Edition

Chapter 12Chapter 12The Benefits The Benefits

Determination Determination ProcessProcess

12-12-22

Chapter TopicsChapter Topics Why the Growth in Employee Benefits?Why the Growth in Employee Benefits? Value of Employee BenefitsValue of Employee Benefits Key Issues in Benefit Planning, Design and Key Issues in Benefit Planning, Design and

AdministrationAdministration Components of a Benefits PlanComponents of a Benefits Plan Administering the Benefits ProgramAdministering the Benefits Program Your Turn: Lightning IndustriesYour Turn: Lightning Industries

12-12-33

What Are Employee Benefits?What Are Employee Benefits?

That part of the total compensation package, other

than pay for time worked, provided to employees in whole

or in part by employer payments, e.g. life insurance,

pension, workers’ compensation, vacation

12-12-44

Exhibit 12.1: Changes in Benefit Costs Exhibit 12.1: Changes in Benefit Costs Over TimeOver Time

12-12-55

Wage and Wage and Price Price

ControlsControls

UnionsUnions

Employer Employer ImpetusImpetus

Government Government ImpetusImpetus

Cost Cost Effectiveness of Effectiveness of

BenefitsBenefits

Why the Growth in Employee Benefits?Why the Growth in Employee Benefits?

12-12-66

Value of Employee BenefitsValue of Employee Benefits

Employees:Employees:

– Expect benefits as part of their total compensationExpect benefits as part of their total compensation

– Do not understand true value of benefitsDo not understand true value of benefits

– Often undervalue their benefitsOften undervalue their benefits

– Often take benefits for grantedOften take benefits for granted

– Often cannot list all benefits receivedOften cannot list all benefits received

– Have preferences regarding types of benefits they Have preferences regarding types of benefits they wantwant

12-12-77

Exhibit 12.2: Ranking of Employee Exhibit 12.2: Ranking of Employee BenefitsBenefits

12-12-88

Key Issues in Benefit Planning, Design,Key Issues in Benefit Planning, Design,and Administrationand Administration

Benefits Planning and Design IssuesBenefits Planning and Design Issues– How to attract good employeesHow to attract good employees

– How to deal with undesirable turnover

– Integrating benefits with other compensation Integrating benefits with other compensation componentscomponents

– Strategies for ensuring external competitivenessStrategies for ensuring external competitiveness

– Ensuring that benefits are adequateEnsuring that benefits are adequate

– Whether employee benefits are cost justifiedWhether employee benefits are cost justified

12-12-99

Benefit Administration IssuesBenefit Administration Issues Who should be protected or benefited?Who should be protected or benefited?

– Series of questions need to be addressedSeries of questions need to be addressed

How much choice should employees have How much choice should employees have among an array of benefits?among an array of benefits?– Concerns choice (flexibility) in plan coverageConcerns choice (flexibility) in plan coverage

– Standard benefit packageStandard benefit package

– Cafeteria-style,” or flexible, benefit plansCafeteria-style,” or flexible, benefit plans

12-12-1010

Benefit Administration Issues (cont.)Benefit Administration Issues (cont.) How issues associated with flexibility should How issues associated with flexibility should

benefits be financed?benefits be financed?– NoncontributoryNoncontributory

– Contributory Contributory

– Employee financedEmployee financed

Are your benefits legally defensible?Are your benefits legally defensible?

12-12-1111

Exhibit 12.3: Contingent Worker Benefits Exhibit 12.3: Contingent Worker Benefits Compared to Full-Time WorkersCompared to Full-Time Workers

12-12-1212

Exhibit 12.4: Possible Options in a Exhibit 12.4: Possible Options in a Flexible Benefit PackageFlexible Benefit Package

12-12-1313

Exhibit 12.5: Advantages of Flexible Exhibit 12.5: Advantages of Flexible BenefitsBenefits

Employees choose packages that best satisfy their Employees choose packages that best satisfy their unique needs.unique needs.

Flexible benefits help firms meet the changing Flexible benefits help firms meet the changing needs of a changing workforce.needs of a changing workforce.

Increased involvement of employees and families Increased involvement of employees and families improves understanding of benefits.improves understanding of benefits.

Flexible plans make introduction of new benefits Flexible plans make introduction of new benefits less costly.less costly.

Cost containment: Organization sets dollar Cost containment: Organization sets dollar maximum; employee chooses within the constraint.maximum; employee chooses within the constraint.

12-12-1414

Exhibit 12.5: Disadvantages of Flexible Exhibit 12.5: Disadvantages of Flexible BenefitsBenefits

Employees make bad choices and find themselves Employees make bad choices and find themselves not covered for predictable emergencies.not covered for predictable emergencies.

Administrative burdens and expenses increase.Administrative burdens and expenses increase.

Adverse selection: Employees pick only benefits Adverse selection: Employees pick only benefits they will use; the subsequent high benefit they will use; the subsequent high benefit utilization increases its cost.utilization increases its cost.

Subject to non-discrimination requirements in Subject to non-discrimination requirements in Section 125 of the Internal Revenue Code.Section 125 of the Internal Revenue Code.

12-12-1515

Financing Benefits Plans: AlternativesFinancing Benefits Plans: Alternatives

Non-contributoryNon-contributory

– Employer pays total costsEmployer pays total costs

ContributoryContributory

– Costs shared between employer and employeeCosts shared between employer and employee

Employee financedEmployee financed

– Employee pays total costs for some benefitsEmployee pays total costs for some benefits

– By law the organization must bear the cost for some By law the organization must bear the cost for some benefitsbenefits

12-12-1616

Exhibit 12.6: Factors Influencing Choice of Exhibit 12.6: Factors Influencing Choice of Benefit PackageBenefit Package

12-12-1717

Exhibit 12.7: Impact of LegislationExhibit 12.7: Impact of Legislationon Selected Benefitson Selected Benefits

12-12-1818

Approaches to Assess Employee Approaches to Assess Employee PreferencesPreferences

Demographic differencesDemographic differences– AgeAge– SexSex– Marital statusMarital status– Number of dependentsNumber of dependents– Blue collar vs. white collarBlue collar vs. white collar

Employee survey via questionnaireEmployee survey via questionnaire Flexible benefit planFlexible benefit plan

12-12-1919

Exhibit 12.8: Questionnaire Format for Benefit SurveysExhibit 12.8: Questionnaire Format for Benefit Surveys

12-12-2020

11 Communicating about the benefits programCommunicating about the benefits program

22 Claims processingClaims processing

33 Cost containmentCost containment

Three Administrative Issues

Administering the Benefits ProgramAdministering the Benefits Program

12-12-2121

Communicating the Benefits ProgramCommunicating the Benefits Program Three elements of effective communicationsThree elements of effective communications

– Company must spell out its benefit objectives and Company must spell out its benefit objectives and ensure communications achieve the objectivesensure communications achieve the objectives

– Match the message with the appropriate mediumMatch the message with the appropriate medium Use of intranet – an internal organizational online Web Use of intranet – an internal organizational online Web

through which all forms of communication within the through which all forms of communication within the organization can be streamlinedorganization can be streamlined

Streamlined call center operation Streamlined call center operation

– Content of communications package must be Content of communications package must be complete, clear, and free of complex jargoncomplete, clear, and free of complex jargon

12-12-2222

Methods of communicationMethods of communication

– Employee handbookEmployee handbook

– Personalized benefit statementsPersonalized benefit statements

– Meetings with employeesMeetings with employees

– Multi-media presentationsMulti-media presentations

– IntranetIntranet

– Streamlined call center operationStreamlined call center operation

Company Benefits

Communicating Employee BenefitsCommunicating Employee Benefits

12-12-2323

Claims ProcessingClaims Processing Claims processor must:Claims processor must:

– Determine whether the act has, in fact, occurredDetermine whether the act has, in fact, occurred

– Determine if the employee is eligible for the benefitDetermine if the employee is eligible for the benefit

– Calculate the payment levelCalculate the payment level

12-12-2424

11 Probationary periodsProbationary periods

22 Benefits limitationsBenefits limitations

33 Co-payCo-pay

44Administrative cost containmentAdministrative cost containment

Prevalent PracticesCost ContainmentCost Containment

12-12-2525

Exhibit 12.12: Basic Primer of Cost Exhibit 12.12: Basic Primer of Cost Containment TerminologyContainment Terminology

12-12-2626

Trends Related to Cost ContainmentTrends Related to Cost Containment Probationary periodsProbationary periods

Benefit limitationsBenefit limitations

CopayCopay

Administrative cost containmentAdministrative cost containment

Retaining strategic function internallyRetaining strategic function internally

Significant movement to outsourcingSignificant movement to outsourcing