Human resource management gaining a competitive advantage 2014 chapter 13

Introduction • The average cost of benefits adds up to about 37 percent for every payroll dollar – benefits compose about 27 percent of the total compensation package • Benefits are unique because: – there is more regulation of benefits than of direct pay – benefits have become almost obligatory for employers to provide – benefits are complex for employees to understand 13-1 Reasons for Benefits Growth • Laws mandating benefits passed during and after the Great Depression • Wage and price controls instituted during WWII and labor shortages • The tax treatment of benefits programs – The marginal tax rate is the percentage of an additional dollar of earnings that goes to taxes • Large group v individual insurance • Organized labor • Employer differentiation 13-2 Benefit Programs Social Insurance Family-Friendly Policies Pay For Time Not Worked Private Group Insurance Retirement 13-3 Social Security • Social Security includes provision for old-age insurance, unemployment insurance, survivors' insurance, disability insurance, hospital insurance, and supplementary medical insurance • Social Security retirement benefits are free from federal tax and free from state tax in some states • Currently, full benefits begin at age 65 or a reduced benefit can begin at age 62 • Both employers and employees are assessed a payroll tax • The eligibility age for benefits and any tax penalty for earnings influence retirement decisions 13-4 Unemployment Insurance • Unemployment insurance has the following objectives: – to offset lost income during involuntary unemployment, – to help unemployed workers find new jobs, – to provide an incentive for employers to stabilize employment, – to preserve investments in worker skills by providing workers with income during short-term layoffs • Unemployed workers are eligible for benefits if they – – – – have a prior attachment to the workforce, are available for work, are actively seeking work, were not discharged for cause, did not quit voluntarily, and are not out of work because of a labor dispute 13-5 Workers’ Compensation • Workers' compensation laws cover jobrelated injuries and death • The system is based on no-fault liability • Approximately 90 percent of U.S workers are covered 13-6 Private Group Insurance • Offered at the discretion of employers, and plans are not legally required • Group rates are lower because of economies of scale, the ability to pool risks, and the greater bargaining power of a group • Medical insurance tends to be the most important benefit for people – The Consolidated Omnibus Budget Reconciliation Act (COBRA) requires employers to permit employees to extend their health insurance coverage at group rates for up to 36 months following a qualifying event, such as termination • Disability insurance includes short-term plans and long-term plans 13-7 Retirement Defined Benefit Plan • Guarantees a specified retirement benefit level to employees • Insulates employees from investment risk, which is borne by the company • PBGC guarantees basic retirement benefit in case of financial difficulties • ERISA increased the fiduciary responsibilities of pension plan trustees, established vesting rights and portability provisions, and established the PBGC Defined Contribution Plan • Does not promise employees a specific benefit level upon retirement • Employers shift investment risk to the employee • There is no need to calculate payments based on age and service • Most prevalent in small companies 13-8 Types of Defined Contribution Plans Money Purchase Plan Employee Stock Ownership Plan Profit-sharing Plan 13-9 Cash Balance Plans • An employer sets up an individual account for each employee and contributes a percentage of the employee’s salary • The account earns interest at a predefined rate 13-10 International Comparisons • Percentage of private sector labor force that is covered by a pension: – United States, 45 percent; – France, 100 percent; – Switzerland, 92 percent; – Germany, 42 percent – Japan, 39 percent 13-12 Pay for Time Not Worked • In the European Community, as many as 30 days of mandated vacation is common • In the United States, there is no legal minimum, although 10 days is common • Sick leave programs often provide full salary replacement for a limited period of time, usually not exceeding 26 weeks • The amount of sick leave is often based on length of service, accumulating with service 13-13 Family-Friendly Policies • To ease employees’ conflicts between work and nonwork, organizations may use family-friendly policies such as family leave policies and child care • The Family and Medical Leave Act: – applies to organizations with 50 or more employees within a 75-mile radius – applies to childbirth or adoption; care for a seriously ill child, spouse, or parent; or for an employee's own serious illness – Employees are guaranteed the same or comparable job when they return to work – Employees with less than a year of service or those who work less than 25 hours a week are not covered 13-14 Family-Friendly Policies • Child Care - Employers may provide some type of child care support to employees: – supplies and helps employees collect information about child care, – vouchers or discounts for existing child care facilities, or – child care facility at or near worksites 13-15 Managing Benefits: Employer Objectives and Strategies • Surveys and Benchmarking – The company should know what the competition is doing – Surveys information is available from private consultants, the Bureau of Labor Statistics (BLS), and the Chamber of Commerce • Cost control – The larger the cost of a benefit, the greater the possibility for savings – The rate of growth may result in serious costs in the future – Cost containment efforts can only work to the extent that the employee has significant direction in choosing how much to spend in a benefit category 13-16 Healthcare: Controlling Costs and Improving Quality • In the United States, health-care expenditures have gone from 5.3 percent of the GNP in 1960 to 14 percent recently • Attempts at cost control have come through employers, since most health care is provided through organizations • A recent trend has been to shift costs to employees through the use of deductibles, coinsurance, exclusions and limitations, and maximum benefits 13-17 Healthcare: Controlling Costs and Improving Quality Health maintenance organizations (HMO) • focus on preventive care and outpatient treatment • require employees to use only HMO services and providing benefits on a prepaid basis • physicians and health-care workers paid a flat salary to reduce incentive of raising costs Preferred provider organizations (PPOs) • have contract with employers and insurance companies, to provide care at reduced fees • not provide benefits on a prepaid basis • employees often are not required to use just the PPOs • tend to be less expensive than traditional health care but more expensive than HMOs 13-18 Employee Wellness Programs • Focus on changing behaviors both on and off work time that could eventually lead to future health problems • There are two broad classes of EWP’s: – Passive • use little or no outreach to individuals and provide no ongoing motivational support – Active • assume that behavior change requires not only awareness and opportunity, but also support and reinforcement 13-19 Health Care Costs and Quality: Ongoing Challenges • Two important phenomena are often encountered in cost control efforts – Piecemeal programs may not work well because steps to control one aspect may lead to employees to “migrate” to other programs that provide medical treatment at no cost to them – There is often a so-called Pareto Group, which refers to a small percentage of employees being responsible for generating the majority of healthcare costs 13-20 Staffing Responsibilities that Control Benefits Cost Growth • Because benefit costs are fixed, the benefits cost per hour can be reduced by having employees work more hours • Have employees classified as exempt, since they can then reduce their benefit costs per hour without having to pay overtime • Classify workers as independent contractors rather than employees, eliminating the employer's obligation to provide legally required benefits 13-21 Nature of the Workplace • Assessing employee benefits preferences is essential • One approach is to use market research methods to assess employees’ preferences the same way consumers’ demand for products and services are assessed • Care must be taken not to raise employee expectations regarding future changes 13-22 Flexible Spending Accounts • These plans permit employees to choose the types and amount of benefits that they want • Advantages include: – employees can be more aware and appreciative of their benefits package – a better match between the package and the employee's needs, which improves satisfaction and retention – cost reductions are often achieved • Disadvantages include: – high administrative cost – adverse selection 13-23 Communicating with Employees 13-24 Flexible Spending Accounts • Permits pretax contributions to an employee account that can be drawn on to pay for uncovered health care expenses • Funds must be spent during the year or they revert to the employer • The major advantage is that take-home pay increases 13-25 General Regulatory Issues • Benefit plans must meet nondiscrimination rules and qualified plans • Sex, age, and disability: – It is illegal for companies to require that women contribute more to a pension plan than men – Employers cannot discriminate against employees over the age of 40 in terms of pay or benefits – employees with disabilities have equal access to the same health insurance coverage as other employees • Monitoring Future Benefits Obligations - The Financial Accounting Statement (FAS) 106 states that any benefits (excluding pensions) provided after retirement, cannot be funded on a pay-as-you-go basis – They must be paid on an accrual basis 13-26 ... programs – The marginal tax rate is the percentage of an additional dollar of earnings that goes to taxes • Large group v individual insurance • Organized labor • Employer differentiation 13- 2... that they want • Advantages include: – employees can be more aware and appreciative of their benefits package – a better match between the package and the employee's needs, which improves satisfaction... coinsurance, exclusions and limitations, and maximum benefits 13- 17 Healthcare: Controlling Costs and Improving Quality Health maintenance organizations (HMO) • focus on preventive care and outpatient