OMM 618 week 6 HR Plain

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Chapter 10

Benefits and Benefits Administration

Learning Objectives

After reading this chapter, you should be able to do the following:

• List and describe the types of benefits that organizations offer.

• Apply psychological motivation perspectives to benefits and benefits administration.

• Describe a systematic process for designing and implementing an effective benefits program.

• Position benefits so that they are a strategic, competitive advantage to be leveraged, rather than a mere expense.

• Integrate the full impact of an organization’s pay and benefits as a package.

• Link benefits with other functions within the HRM process.

• Discuss opportunities, challenges, and recent developments in benefits and their administration.

Pre-Test Chapter 10

Pre-Test

1. Which of the following is NOT one of the mandatory benefits?

a) Workers’ compensation

b) Social Security

c) Severance pay

d) Jury duty leave

2. is a phenomenon that refers to employees who report to work while sick but have low productivity.

a) Presenteeism

b) Attendance

c) Tardiness

d) Absenteeism

3. is offered to employees when their employment is terminated. The amount paid to an employee depends on the length of his or her employment, as well as the employee’s level within the organization.

a) A pension plan

b) Social Security

c) Workers’ compensation

d) Severance pay

4. Which of the following is NOT one of the characteristics of an effective benefits program?

a) It should give employees the services they actually want and need.

b) It should be affordable for both the employee and the employer.

c) It should put more emphasis on organizational needs.

d) It should help recruit and retain quality talent.

5. Which other HRM processes should be kept in mind when making decisions about planning benefits?

a) Training, severance, and overtime.

b) Flextime, unique assignments, and promotion.

c) Social security, unemployment insurance, and compensation.

d) The overall package of compensation and rewards.

6. Unionized employees usually receive the same range of benefits as those who are nonunion members.

a) True

b) False

Answers 1. c) Severance pay. The correct answer can be found in Section 10.1.

2. a) Presenteeism. The correct answer can be found in Section 10.2.

Introduction Chapter 10

3. d) Severance pay. The correct answer can be found in Section 10.3.

4. c) It should put more emphasis on organizational needs. The correct answer can be found in Section 10.4.

5. d) The overall package of compensation and rewards. The correct answer can be found in Section 10.5.

6. b) False. The correct answer can be found in Section 10.6.

Introduction Benefits are commonly referred to as fringe compensation or “perks” (perquisites), compen- sation that is neither a wage nor a salary. However, as mentioned in Chapter 9, conversations about wages, salaries, and benefits should be approached as a conversation about total com- pensation rather than separate concerns. According to the Bureau of Labor Statistics (2013), average benefits constitute about 30% of total compensation—making benefits huge expen- ditures that amount to billions of dollars a year. While only about 7% of benefits expendi- tures are legally required, employers often voluntarily provide their employees with numerous additional benefits in the hope of gaining a competitive advantage in attracting, retaining, and motivating the right talent. In practice, however, the relative advantages of various ben- efits are difficult to quantify. Tightened margins, weak markets for products and services, and an intense focus on cost cutting are often roadblocks for organizations considering more robust benefits for employees (Custers, 2013). Further, the responsibility for benefits currently shouldered by U.S. employers is increasingly viewed as a burden given the competitive pres- sures brought about by the globalization of products and services, demographic shifts in the workforce, health care inflation, and uncertain immigration policies (Dulebohn et al., 2009). Such difficulties have led many organizations to adopt simpler approaches, such as imitating other employers within their community or industry or basing benefit decisions on resources such as available funding, space, time, or information. While this chapter makes the case for the strategic importance of benefits, it does so with an eye toward the economic realities of today’s labor market.

O P E N I N G C A S E S T U D Y

Statistical Analysis Software (SAS) Is One of the Best Companies to Work For

The links below describe SAS—a company that excels in using a generous benefits package as a source of human-based competitive advantage through attracting, motivating, and retaining talent. SAS has consistently received one of the top rankings in Fortune magazine’s “100 Best Companies to Work For.”

World’s best employer, SAS (part 1) http://www.youtube.com/watch?v=RtANL3MMjPs

Fortune 100 Best Companies to Work For http://money.cnn.com/magazines/fortune/best-companies/2013/snapshots/2.html?iid=bc_sp_list

(continued)

http://www.youtube.com/watch?v=RtANL3MMjPs

http://money.cnn.com/magazines/fortune/best-companies/2013/snapshots/2.html?iid=bc_sp_list

Legally Required Benefits Chapter 10

10.1 Legally Required Benefits Employers are required by law to provide specific mandatory benefits. As legal require- ments of every employer, mandatory benefits cannot realistically be considered as offering a strategic competitive advantage but rather constitute part of the economic rent that must be paid to secure a workforce.

Workers’ Compensation

Covered by state laws rather than federal laws, workers’ compensation programs are a major manifestation of social insurance, promoting the primary goal of providing income to support families facing unanticipated hardships when a worker becomes injured or ill on the job (Bronchetti, 2012). As a form of “no fault” insurance (i.e., workers are eligible even if their actions caused the accident), workers’ compensation provides cash benefits and medical care to employees injured in the course of employment and survivor benefits to dependents of workers whose deaths are work-related. However, in exchange for such benefits, workers relinquish the right to pursue legal action against the employer for negligence.

Employers supply workers’ compensation coverage by either purchasing insurance from a private carrier or through self- insurance. When purchased through a private carrier, the cost to an employer is determined by the amount of claims paid out. A study by the National Academy of Social Insurance reported the total cost of workers’ compensation coverage to employers in 2011 was $77.1 billion, while benefits paid to employees totaled $60.2 billion with $29.9 billion distributed in medical care and $30.3 billion distributed as wage replacement (Insurance Journal, 2013). Implementation of employer safety programs has been shown to contribute to fewer fatal accidents (albeit in the pres- ence of an increasing number of minor,

SAS website http://www.sas.com

Discussion Questions 1. Which of the benefits offered by SAS resonate most with your own needs?

2. Why is the SAS model so successful?

3. What lessons could your current employer learn from the SAS model?

4. What could be some of the challenges in applying the SAS model to your current workplace?

5. Reflect on the content, process and equity, and behavioral perspectives of motivation discussed in Chapter 9. To what extent do they also apply to the benefits offered by SAS?

Corbis/SuperStock

▲▲ Workers’ compensation is a form of insurance that covers on- the-job injuries.

http://www.sas.com

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but less costly, accidents), thus stabilizing, if not reducing, the cost to employers of worker compensation claims (Milkovich et al., 2011).

Social Security

Social Security benefits were first established by the Social Security Act of 1935, through which employers offer retirement benefits. Social Security is a social insurance program that provides benefits to previously employed individuals. Benefits added later include access to medical insurance (i.e., Medicare) and prescription drugs for the aged and disabled, benefits for dependents of retired or disabled workers, benefits for surviving family members of a deceased worker, and lump-sum death payments.

To qualify for these benefits, a worker must be employed in work covered by the act and earn a specified amount of income (approximately $780 in today’s dollars) for each quarter-year of coverage; 40 quarters of covered employment will insure any worker for life. The amount received is tied to the amount contributed by the worker during the eligible quarters of employment through dedicated payroll taxes called the Federal Insurance Contributions Act (FICA) tax. For every dollar contributed by the employee, there is a matching amount paid by the employer. FICA taxes currently represent about 15.3 % of an employer’s payroll, and because Social Security is foremost a source of income retirement to employees, Milkovich et al. (2011) suggest that employers consider reducing any private pension payouts by a cor- responding amount.

Unemployment Insurance

Unemployment insurance was established as part of the Social Security Act of 1935 and the Federal Unemployment Tax Act of 1939 to provide a floor of coverage for unemployed individuals. While created by federal law, unemployment insurance is administered at the state level and now covers almost all private and public sector employment (i.e., 86% of the civilian labor force). Workers unemployed through no fault of their own (this does not include those who leave a job without good cause), who are lawfully ready, willing, and able to work, who are actively seeking work, and who met state requirements for wages earned or time worked during the most recent 12 months (referred to as the “base period”) are entitled to unemploy- ment benefits. Benefits are typically set at about 50% of the worker’s weekly earnings, with minimum and maximum amounts that vary by state, and benefits can typically be drawn for 26 weeks (Kilgour, 2010).

In the majority of states, unemployment compensation paid out by a firm is financed by federal and state unemployment taxes deposited into insurance funds managed by the U.S. Treasury Department. The federal tax amounts to 6.2% of the first $7,000 earned by each worker, the state imposes an additional tax above that, and companies may pay an extra amount depending on their experience rating. That is, the more money paid out to unem- ployed workers on behalf of the firm, the higher the unemployment insurance rate for that firm. Thus, well-designed human resource planning systems play a vital role in controlling the costs of unemployment insurance (Milkovich et al., 2011).

Health Care Coverage

Until recently, health care coverage has traditionally not been required by federal statute of any employer. However, the requirements of the Patient Protection and Affordable Care Act

Legally Required Benefits Chapter 10

(PPACA) of 2010, which went into full effect in 2014, introduced major changes in employer obligations. The requirements of the law are too numerous and complex to discuss fully in this chapter, but a brief overview of the requirements in the statute and likely employer responses follows.

• First, insurance exchanges are to be established by each state (if a state refuses, the federal government will establish such an exchange) through which individuals and small businesses can purchase health care coverage, and all individuals not covered by an employer-based health care plan are required to purchase coverage through an exchange or pay an annual penalty of $675 (to be waived for low-income individuals).

• Second, any firm employing more than 49 full-time employees (i.e., employees working more than 29 hours a week) is required to offer affordable health care coverage (i.e., premiums paid by the employee must not exceed 9.5% of his or her household income and the benefits, at a minimum, must pay 60% of incurred costs). Employers that fail to offer such coverage must pay an annual penalty of $2,000 for each full-time worker; if an employee’s insurance premium exceeds 9.5% of his or her income, the employer will be fined $3,000. Further, employers must provide to employees a uniform summary of benefits and coverage and must report the value of the health benefits on employees’ W-2 forms.

• Third, employer-based health care plans can have no annual or lifetime maximum on benefits paid, the employee cannot be charged a co-payment for a broad category of preventive care [and contraceptives], and the plan must take all employees who apply regardless of their health history. In addition, while there is no requirement to cover spouses, children up to 26 years of age must be covered by the plan.

• Fourth, the “Cadillac tax” takes effect in 2018 for employer-based plans in which employer-paid premiums exceeding $10,200 for single coverage and $27,500 for fam- ily coverage are subject to an excise tax of 40%, and beginning in 2013 there is an indexed annual cap of $2,500 that employees are permitted to put into flexible spend- ing accounts or health savings accounts.

• Finally, the act prohibits a waiting period for coverage in excess of 90 days.

There are three possible over-arching strategies that employers might consider in responding to the requirements of the statute: 1) Drop employer-based health care coverage, 2) drop cov- erage and subsidize health care coverage through exchanges, and 3) continue employer-based health care coverage (Pratt, 2013).

Perhaps a recent survey by the International Foundation of Employee Benefits Plan (2013) provides a more focused insight into how employers are likely to respond to this new law. Of the firms completing the survey, 81% stated that their current plans meet the minimum values specified by the Patient Protection and Affordable Care Act; 74% said that their plans meet the affordability requirements; 17% stated that they had already started to redesign their plans to avoid the “Cadillac tax” in 2018; 41% reported that they plan to increase employees’ share of premium costs; and 34% plan to increase the employee share of dependent cover- age. Interestingly, 16% reported that they have already adjusted hours, or plan to make such adjustments, so that fewer employees will qualify as full-time employees. (For example, a 2011 study by Furchtgott-Roth and Banerjee projected that firms in the retail and restaurant indus- tries will become more automated or machinery-intensive and thus will hire fewer workers in response to the law.) A significant majority—94%—of the survey respondents reported that

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they would not likely discontinue their health care plans and shift employees into the public exchanges because of concerns about retaining or attracting talented employees. However, Hethcock (2013) noted that an increasing number of big businesses (including Walgreens, United Parcel Systems, and the Kroger and Trader Joe’s grocery chains) have announced plans to move full-time employees, part-time employees, spouses, and retirees from their company health plans to public or private exchanges.

At this point, employers are likely to be confused and uncertain about the best strategy for dealing with the law. Since this law was relatively new and the regulations around it were evolving at the time of writing this textbook, the following link provides access to the most up-to-date information about PPACA.

Web Links

Patient Protection and Affordable Care Act http://ppaca.com/

This website provides more details and updates on the Patient Protection and Affordable Care Act.

Discussion Questions 1. What are some of the benefits and challenges of PPACA to employers and employees?

2. To what extent is PPACA utilized in your workplace?

3. If you have a choice, would you opt for employer-based health care coverage or coverage through insurance exchanges? Why?

When an employer does provide health care coverage, two mandates are enforced: the Consolidated Omnibus Budget Reconciliation Act (COBRA) and the Health Insurance Portability and Accountability Act (HIPAA). Both acts extend health care benefits to employees who leave their employers, but only employers with 20 or more employees are subject to COBRA. People are eligible to receive extended health care coverage under COBRA for reasons including voluntary or involuntary job loss and the death of or divorce from the pri- mary insured family member. However, displaced workers or their families are usually required to pay the full cost of the employer’s health insurance plan plus a 2% administration fee, and coverage typically lasts for only 18 months. If an employee changes employers or loses his or her job, HIPAA then grants the employee the right to retain the same health insurance plan or replace the plan, regardless of pre-existing health conditions. In addition, HIPAA also protects the security and privacy of health information.

Family and Medical Leave

The Family and Medical Leave Act (FMLA) of 1993 applies to federal, state, and private employers with 50 or more employees. When employees have been with the employer for a minimum of 1,250 hours during 12 months prior to the leave (the 12 months need not be con- secutive), the law requires employers to allow these workers 12 weeks of unpaid leave every year for such medical and family needs as the birth, adoption, or placement into foster care of a child. These employees may also receive this unpaid leave to attend to a family member who is ill. Employers must secure the same positions, or other positions with equivalent pay, for employees when they return to work at the end of a leave.

http://aca.com/

Legally Required Benefits Chapter 10

When a leave is foreseeable, the employee must give 30 days’ advance notice. When a leave is not foreseeable, the employee must give notice as soon as practicable and possible taking into account all of the facts. The employer may commence a request for completion of a medical certification form no later than five business days after an employee gives notice of the need to leave, or in the event of an unforeseen leave within five days after the leave commences. Employees must be given a minimum of 15 days to complete the certification form in both situations. Employers may request a recertification after 30 days of FMLA leave (Dwoskin & Squire, 2010).

Web Links

The Family Medical Leave Act http://www.dol.gov/whd/fmla/

This website provides more details and updates on the Family Medical Leave Act.

Discussion Questions 1. What are some of the benefits and challenges of FMLA to employers and employees?

2. To what extent has FMLA been utilized in your workplace, by whom, and for what purposes?

Military-Related Absence Protection

The Uniformed Services Employment and Re-employment Rights Act of 1994 provides an employee who gives proper notice of the need for military-related absence protection from discrimination or retaliation. An employer is not required to pay an employee during military absence, but the employer is prohibited from requiring the employee to use his or her paid time-off benefits for such an absence (although the employer must grant all the use of paid time-off if the employee requests it). While on military absence, the employee has the right to elect to continue receiving the existing employer-based health care plan for himself or herself and spouse for up to 24 months in the military. An employer may not deny an employee on military absence reemployment, retention in the firm, promotion, or any benefits of employ- ment. That is, upon successful completion of military duty, the employee must be restored to the job and the benefits that would have been attained if he or she had not been absent (U.S. Department of Labor, 2013).

Jury Service Protection

The Federal Jury System Improve Act of 1978 prohibits an employer from discharging, threatening to discharge, intimidating, or coercing any employee based on the employee’s jury service. The law requires that any employee who takes jury duty leave be treated in the same way as all other employees on an approved leave of absence with respect to employ- ment benefits and that the employee be restored to his or her same position upon return from jury duty. If an employee is classified as “exempt” under the FLSA and called to jury duty, an employer may not make any deductions from the employee’s pay in a week during which he or she performs any work whatsoever. However, an employer is not required to pay a nonexempt employee for any time taken off to fulfill obligations for jury service (Business & Technology Law Group, 2013).

http://www.dol.gov/whd/fmla/

The Strategic Importance of Voluntary Benefits Chapter 10

10.2 The Strategic Importance of Voluntary Benefits In the past, few organizations purposefully linked their employee benefits programs to an overall business strategy, typically viewing HR as a cost-driver rather than a strategic part of the business. Benefits administration usually started with either management providing a predetermined budget or HR providing a list of specific plan offerings for consideration. Thus, the process has traditionally been reactive in nature, and as a result employers have fre- quently forfeited the opportunity to align benefits with the overall business strategy (Leopold, 2010). While “cash will always be king,” in today’s business environment benefits can be a crucial way to attract the right talent to an organization (Custer, 2013). Employees consider benefits when they decide which employer to work for, decide whether to work for a different employer, and decide when to retire. All these decisions depend on the benefits an employer offers, the extent to which the employee values these benefits, and how well the benefits compare to the benefits offered by other employers. Employers gain a significant competitive advantage if they are able to strategically design their benefit pack- ages to appeal to the types of talent they hope to attract. However, as workplace diversity increases, the needs of different groups of employees grow increasingly varied. Organizations should offer a wide range of benefits that cater to the needs of diverse groups of workers and that can be customized to each employee or group of employees based on their needs. Leopold (2010) argues that employers must move away from the traditional notion of benefits—medical coverage, retirement accounts, time-off policies, etc.—and toward strategies of health and wellness, financial security, life balance, and the totality of an employee’s experience.

In any economy, the companies that succeed often are those that can inspire and motivate their workforce toward a common goal, and a solidly competitive total compensation package can contribute. As employees face little prospect for any meaningful increases in wages or sal- aries in the foreseeable future, employers have an opportunity to focus on creating a positive work environment by offering benefit incentives that keep employees motivated and commit- ted to the firm’s business strategy (Custer, 2013). Chapter 9 includes three major perspectives on human motivation: content, process and equity, and behavioral perspectives. Like pay and other financial incentives, benefits help motivate employees and satisfy such basic needs as Maslow’s physiological and safety needs, Alderfer’s existence needs, and Herzberg’s hygiene factors. In terms of motivational processes, Vroom’s expectancy theory implies that high- valence benefits can have a significant motivational power, as can benefits’ high expectancy and instrumentality. Equity and justice in benefits and their administration are also crucial for motivation and morale. Finally, benefits can be contingent on performance and other specific, desirable workplace behaviors, making benefits more likely to boost performance dimensions and result in other desirable employee behaviors.

Steve Hix/Fuse/Thinkstock

▲▲ As workplace diversity increases, organizations need to offer a wider range of benefits to meet the needs of employees belonging to various diverse groups.

The Strategic Importance of Voluntary Benefits Chapter 10

These different motivational perspectives may yield contradictory information regarding vari- ous benefits’ use and administration. Consider the following examples:

• Traditionally, health insurance has been an extremely desirable benefit, and employees have been attracted to employers who provide health insurance benefits because these benefits satisfy safety and security needs. Yet, both the percentage of workers with employment-based health benefits and the comprehensiveness of that coverage have been declining in the past decade (Fronstin, 2012); further, the influence of the PPACA on employer-provided health care coverage remains to be seen. Health insurance has generally been administered as a group benefit regardless of individual performance, seniority, or health condition; therefore, many employees do not perceive this benefit to be equitable. For example, two employees would receive the same benefit and would pay the same premium even though one of them is healthy and rarely goes to the doc- tor, while the other has a chronic condition and undergoes multiple surgeries a year. Nor is health insurance linked to performance outcomes, a fact that makes it impossible to use this benefit to build instrumentality or use it as a behavioral management tool.

• Some organizations provide access to childcare, elder care, and fitness centers at a dis- count or at no cost to employees. These benefits are important to attract and retain some employee groups. However, employees who do not need these benefits, or who are able to obtain them from other sources (e.g., through a spouse’s employer), will not find them motivating. Furthermore, these employees may perceive these benefits as inequitable since no additional compensation or alternative benefits are provided to employees who do not utilize them.

• Flexible work arrangements such as flextime, job sharing, and telecommuting are forms of benefits, and they are becoming increasingly common. Many employees find this flexibility attractive because it can help them balance work with other life activities, interests, and commitments. However, these benefits are not appropriate for positions that require physical presence and set working hours. Consequently, most organizations that offer flexible work arrangements offer them to only a subset of their employees, which other employees may find unfair. Furthermore, these arrangements can reduce managers’ ability to directly observe their employees and reward appropriate behav- iors or discipline such unacceptable behaviors as procrastination, working in a noisy or distracting environment, or compromising quality or safety to finish work faster. As a result, high performers may go unnoticed and unrewarded, while low performers may sustain their unacceptable work habits without direction or consequences.

It is understandable that not all benefits will attract the same types of employees or moti- vate them equally. Benefits also affect retention rates. For example, in a recent survey by the Metropolitan Life Insurance Company (2011), employees who were satisfied with the benefits they received from their employers were more than three times as likely to be highly satis- fied with their jobs. Compared to employees who were dissatisfied with their benefits, these employees were also more likely to have a sense of loyalty to their employers, less likely to leave in the next 12 months, and more likely to view benefits as an important reason to stay with their current employers.

Finally, benefits can enhance employee productivity by improving employees’ physical and psychological health. For example, when employees experience physical health problems, they do not report to work. The result is unscheduled absenteeism that can disrupt work flow. Even when an organization does not provide employees with sick-leave benefits, employ- ees may report to work while sick but have low productivity, a phenomenon referred to as

Voluntary Benefits Chapter 10

presenteeism (Koopman et al., 2002). Health insurance and paid sick leave are examples of benefits that can alleviate these performance problems. Stress and burn-out due to conflict- ing work and life demands can also compromise employees’ psychological health, leading to lower productivity (Maslach, 2005). Work-life benefits can help employees deal with such conflicts by reducing stress and burn-out and thus enhancing productivity. In these ways, work-life benefits can yield a significant return in terms of talent attraction, motivation, reten- tion, and increased productivity. These returns make work-life benefits strategically important and a source of potential competitive advantage.

10.3 Voluntary Benefits Employers offer voluntary benefits to attract, motivate, and reward talent. Offering these benefits also increases employers’ ability to meet the needs of a greater number of diverse employee groups. This section discusses some of the more common types of voluntary ben- efits offered by employers.

Health, Dental, and Vision Insurance

Health, dental, and vision insurance and prescription coverage have been among the most common voluntary benefits that employers provide. Preferred provider organization (PPO) and health maintenance organization (HMO) are two types of health care plans that employers have traditionally utilized in an attempt to control the cost of health care coverage. In a PPO, a managed care organization of doctors, hospitals, and other health care providers makes a covenant with an insurer to provide health care services to employees or members at reduced rates. Employees are not restricted to preferred providers. However, if employees choose other providers, the employees pay the cost differences.

In contrast, HMOs connect employees with contracted primary care physicians who provide most of the care and treatment needed; HMOs refer patients to contracted specialists only as needed. Receiving services from providers who are not contracted or without a referral usually results in the employee’s bearing the full costs. HMOs tend to be less expensive than PPOs, but they also tend to be more restrictive and to have higher deductible and co-pay costs that must be paid by the employee. The overall costs of both plans are typically shared by the employer and the employee, who usually has a pre-established amount deducted from each paycheck representing the employee’s share of the insurance premium. However, health-related expenses can be paid using pretax dollars if the employer allows employees to set aside a portion of their pay in a flexible spending account or a health savings account.

Pension Plans

A pension plan is a retirement plan offered by an employer and funded by both the employer and employee. The employer’s contributions go toward the employees’ pension pool of funds. The two most common pension plans are defined-benefit and defined-contribution plans. In a defined-benefit pension plan, the employee receives a fixed amount of benefit at retire- ment, based on the amounts invested by the employer, employee, or both. This type of pension plan does not depend on the performance of the investment pool. Some 40 million U. S. work- ers in the private sector and concentrated in auto manufacturing, steel, and airlines are covered by defined benefit plans governed by the strict provisions of the Employee Retirement Income Security Act (ERISA) of 1974. Under the ERISA, these individuals are supposedly protected, even if their employers go bankrupt, by the Pension Benefit Guarantee Corporation (PBGC), created

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by the federal government and financed by a tax on businesses. Unfortunately, the PBGC has been in the red for 31 of its 38 years of operation, and at present its liabilities total $119 billion while assets used to cover pension obligations total $85 billion (Gordon, 2012).

A little noticed change in the tax code in 1978 created the 401(k) as a special benefit for top- level executives in addition to their defined benefits plan. When employers realized that their retirement liabilities under defined benefits programs were increasing exponentially given that retirees were living longer, healthier lives, they decided to reduce their liability under the defined benefits plan by using defined contributions plans to finance employee 401(k)s (Hamilton, 2011). In a defined-contribution pension plan, fixed contributions are made by the employer, the employee, or both. The amount the employee receives at retirement depends on the performance of the funds and other financial vehicles in which the contribu- tions were invested. While defined-contribution plans are more common in today’s workplace than defined-benefit plans—by 2006, 70% of corporate employees had 401(k)s or other defined contribution plans—the 401(k) was never designed to be a pension plan. Originally, it was intended to be a savings investment plan that provided a little extra for employees at the top of the organization (Hamilton, 2011). The switch from defined benefit to defined contribu- tion plan shifted the risk of poor investment performance from the employer to the employee and put the onus for retirement on the backs of the organization’s nonexecutive employees (Short, 2002). If the market rises at the right time, things are great. If it falls at the wrong time, a retiree can be wiped out, and many who had been looking forward to retirement or who were already retired were ruined in the crash of 2008 (Floyd, 2010).

The same economic crisis in 2008 that so devastated the 401(k)s of private employees and retirees also reduced the value of the retirement funds of state, county, and municipal public employees. Floyd (2010) reported a study of economists at the University of Rochester and Northwestern University that put the level of underfunding of public employee pensions at $3 trillion for state governments and almost $600 billion for municipalities. Such underfunding has led a number of public entities—such as Central Falls, Rhode Island; Stockton, California; and Jefferson County, Alabama—to declare bankruptcy and to default on their pension obliga- tions to retirees. Further, given that most mandatory retirement age laws have been dropped, government agencies are increasingly encouraging employees to forestall retirement as long as possible and to continue working, thus attempting to alleviate paying out promised—but underfunded—retirement plans (Schieber, 2012; Miller, 2012).

Severance Pay

Severance pay is offered to employees upon termination of employment. The amount paid depends on the employee’s length of employment and level of employment within the orga- nization. There is no rule for calculating severance pay, but when considering payment of severance benefits it is beneficial to have a written plan that meets the rigorous requirements of ERISA. By having a severance plan that is in compliance with the requirements of this legis- lation, an employer is in the best possible position to defend against a lawsuit involving sever- ance pay (Bokert, 2004). In lieu of severance pay or in addition to it, some employers may also pay for continued health insurance and outplacement assistance.

Paid Time Off (PTO)

Paid time off (PTO) is another voluntary benefit that is offered by many employers but is not legally required by federal and most state statutes. In the United States, most employers offer

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fewer paid holidays per year than orga- nizations offer in other countries. In fact, the United States is the only advanced economy that does not require employ- ers to provide paid vacation days, with the result that 23% of American workers receive no paid vacation (Payne, 2013). For decades, traditional PTO plans in the United States were restricted to vacations, holidays, and a limited amount of sick leave. Today, most companies are switch- ing to plans that lump all PTO together into one total allotment and deduct any day missed from work from this allotment (Milkovich et al., 2011). The number of PTO days or hours offered by an employer depends on the employer’s policies and union contracts. The amount of PTO may also vary depending on an employee’s length of employment within an organization. Vacation, sick, and bereavement leave can sometimes be accumulated from year to year. While some employers have a “use it or lose it” policy, PTO can also be coordinated with a credit-based flex plan that allows employees to convert unused paid time off into taxable compensation (Korotin, 2011).

Other Types of Voluntary Benefits

Other possible voluntary benefits include short- and long-term disability insurance, life insur- ance, and domestic partner benefits; tuition assistance or reimbursement for employees pursu- ing further education; employee assistance programs (EAPs) to confidentially help employees who may have alcohol abuse, substance abuse, or psychological problems; financial services such as credit unions and financial counseling; on-site or discounted memberships in fitness facilities; childcare referrals, on-site childcare services, or other childcare assistance; elder-care referrals or assistance; and social and recreational benefits such as tennis courts, bowling leagues, and employer-sponsored athletic teams.

Legal Considerations in Offering and Administering Benefits

In addition to the legally required and highly regulated mandatory benefits, voluntary ben- efits are also subject to legal and regulatory considerations that should be taken into account when those benefits are offered and administered. Some of these considerations are related to taxes, while others relate to accounting practices and still others relate to discrimination laws. Here are some examples of these legal and regulatory considerations:

• To qualify for certain tax benefits, pension plans should meet specific criteria—notably vesting. Plans should also meet nondiscrimination rules that encourage all employees, and not just highly compensated employees, to participate.

• In addition, nondiscrimination rules prohibit basing retirement benefits on gender. Women tend to live longer than men do, but female employees must not be offered more limited pension benefits or be required to contribute more than male employees toward defined benefit plans.

▲▲ Paid vacation time is a voluntary benefit offered by many employ- ers, but it is not required by law.

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• Disability benefits are also subject to nondiscrimination laws. For example, the Pregnancy Discrimination Act is a nondiscrimination law; it requires that pregnant employees be offered benefits as if they were disabled.

• According to the Financial Accounting Standards Boards (FASB), benefits funds are to be set aside and paid after retirement. They are to appear on financial statements as future cost obligations, reducing the organization’s reported annual income.

To add to these complexities, benefits design and administration are governed by laws and regulations that change continually. This fact challenges organizations to stay up to date on all the developments that can have an impact on how they run their benefits programs. The costs of operating benefits programs may also include hiring specialists and lawyers to ensure legal compliance.

Flexible Benefits

An increasing number of employers grant employees the freedom to choose their benefits. Especially in today’s diverse workforce, employees’ needs differ by age, family status, and life- style. Employers are coming to realize that they need to offer different groups of benefits, or flexible benefits. A flexible benefits plan, which is also called a cafeteria plan, allows employ- ees to select a combination of benefits from a pool of choices within some overall limits.

Flexible plans have grown in popularity, and they have many advantages. For example, a study by Lee and Too (2008) suggests that employees experience greater satisfaction with flexible benefits than the administration of traditional benefits because they have greater control in determining and selecting the benefits they desire. Further, employees satisfied with their flexible benefits demonstrated greater commitment to their employer and lower intentions to quit. However, flexible benefit plans also have some drawbacks; one is that these plans have become extremely complicated. Organizations need to invest much time and effort into designing flexible plans, and sophisticated information systems are needed to keep track of the various choices that employees make. Another drawback is that as employees opt in and out based on changing needs, the organization can lose its economies of scale for some benefits and employees who opt in at later dates may have to pay higher rates. For example, an organization may offer an on-site fitness or childcare facility, but only a small number of employees may elect to use it. In that case, the cost per employee could be pro- hibitively expensive, and the facility could be difficult to justify. As another example, if healthy employees opt out of health insurance, this could increase the rate of illness for the group of employees who remain in the plan, which could cause health insurance providers to view the organization as a higher risk entity, which could then lead to higher premiums.

Work-Life Benefits and Flexible Work Arrangements

Employees are continually looking for ways to improve their work-life balance while at the same time advancing their professional and career prospects (Custer, 2013). Offering work-life benefits and flexible work arrangements can enable employees to have healthier, less stress- ful, and more enjoyable lives by helping them fit family, community, and social commitments into their schedules. Therefore, employers can use these benefits strategically to attract, moti- vate, and retain talented employees (“Flex work heads,” 2010). Unfortunately, many employ- ers overlook the strategic importance of designing jobs and work arrangements in ways that give their employees the flexibility to balance their overall life needs with their work demands (Testa, 2010). Examples of work-life benefits include

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• childcare

• elder care

• health and fitness initiatives

• arrangements with various vendors to provide these and other services (e.g., laundry, dry cleaning, car detailing, or catering) at a discount or no cost to employees

In contrast to most developed nations in the Western World, the United States stands alone in its reliance on the free market to set work hours and work schedules among employees (Brescoll et al., 2013). Rather than having a public policy regarding flexibility in an employee’s hours of work, the conditions set forth in FLSA force the majority of employees to ask their supervisors to schedule accommodations and forces managers to decide on a case-by-case basis to grant or deny such a request. As a result, one in three U.S. workers report feeling chronically overworked (Galinsky, et al., 2005), and approximately 89% report desiring more flexibility in their work arrangement (Galinsky et al., 2004). Here are some examples of flexible work arrangements, which are discussed in more detail in Chapter 4:

• flextime

• a compressed workweek

• job sharing

• telecommuting

• part-time work

Interestingly, research has revealed that access to such arrangements is limited and pre- determined. While less educated workers hold jobs requiring their presence during regular hours and seldom gain flexibility in work arrangements (Golden, 2008), greater flexibility is a privilege associated with higher status jobs (Glauber, 2011). Women have greater access to flexible work schedules when they work for large firms, but men have greater access when they work for smaller firms (Glauber, 2011). Managers are more likely to grant flexible work- ing arrangements to men of high status seeking to advance their careers, but requests from women are less likely to be granted irrespective of the job status or reason (Brescoll et al., 2013). Union workers and workers in the public sector have less access to flexible work schedules (Glauber, 2011). Finally, allocation of flexible work schedules appears to be more influenced by the employer’s perceived cost savings than by the employee’s needs and a conscious design to promote retention of those workers with leverage in the labor market (Golden, 2008).

Work-life benefits and flexible work arrangements can contribute to greater employee job satisfaction and lower employee stress levels, which in turn positively influence productivity and overall employee health. These arrangements can also help align employee and organi- zational goals by allowing employees to pursue further education, training, and other growth and development opportunities. However, these benefits must be carefully monitored and coordinated; otherwise, they can be misused, abused, or used ineffectively. For example, underutilized work-life benefits can be very costly. Compressed workweeks may negatively impact product quality if employees become fatigued because of the longer workdays. Job sharing is not effective without compatibility and communication between partners. In tele- commuting, keeping good records to ensure payment for overtime and minimum wage can be complicated. There is a possibility of overstating or understating the telecommuting hours worked, which means that there is a possibility of violating the FLSA’s record keeping provi- sions (Guiler & Kelly, 2009).

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Special Benefits for Unique Assignments

Some organizations offer special benefits to reward employees who accept unique assignments that require special accom- modations, such as relocation, excessive working hours, unpredictable work sched- ules, challenging working conditions, learning new skill sets, or dealing with unique customer groups. Some organiza- tions help transferred employees buy new homes and sell previously occupied ones. Organizations may also provide employ- ees and their families with information or assistance regarding such life matters as churches, medical facilities, schooling, and sports. Other organizations help relocated

workers’ spouses find jobs. Some employers provide special benefits to reward those who undertake special assignments; examples of these benefits include company-owned and fur- nished housing; company jets and vehicles; and cooks, nannies, and cleaning crews paid for by the organization.

Wavebreakmedia Ltd/Thinkstock

▲▲ Some organizations offer special benefits to employees who accept unique assignments, such as those that require relocation.

E Y E O N T H E G O A L

A Cost-Benefit Approach

There is now significant evidence that investing in benefits can substantially increase performance and decrease costs. For example, a study of Fortune 500 companies introducing work-life initiatives has shown that simply announcing those initiatives was followed by a 0.39% increase in average share prices (Arthur, 2003). Another study of the “100 Best Companies for Working Mothers” found that the total returns on common stock among those companies consistently outperformed market benchmarks over an eight-year period (Cascio & Young, 2005). A third study showed that employers who contributed more to the costs of their employees’ health and wellness outperformed employers who simply passed the increasing costs of health care to their employees (Towers Watson, 2010). General Motors has found that obesity costs the company an additional $1,000 to $3,000 per year per obese employee in health services, which add up to about $300 million in additional costs (Hawkins, 2005). In general, workplace initiatives targeting increased physical activity have been shown to significantly reduce illness and health care costs and to increase employee productivity (World Health Organization, 2003).

An important question is whether organizations that provide superior benefits outperform others because of the benefits they provide, or whether better performing organizations simply have the means to provide superior benefits. These studies do not prove that a company’s benefits package is the cause of higher performance. However, these studies and many others definitely indicate that it is beneficial for organizations to pay respectful attention to workers and accommodate their needs. A whole-person perspective is necessary in the design and implementation of workplace benefits.

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10.4 Benefits Program Design and Administration Just because a particular benefits package is successful at one organization does not mean that the same package can be readily applied to another organization with the same effec- tiveness. However, success stories such as SAS, discussed in the opening case, offer important lessons for other organizations as they optimize the design and implementation of their own benefits programs. Regardless of an organization’s type, size, and industry, an effective ben- efits program should

• provide employees with services they truly need and desire

• be affordable for both the employer and the employee so that the program can achieve its goals and objectives in a cost-effective way

• give employees a range of plans and options

• boost employee morale and enhance organizational productivity through motivational content, process, equity, and linkages to employee behavior

• improve the effectiveness of the recruitment process by attracting and retaining quality talent

The rest of this section discusses some of the most critical steps in designing and implement- ing an effective benefits plan. Figure 10.1 outlines these steps.

Program Goals

For an organization’s benefits program to be effective, it should start by setting program goals. Now, much has been made in this chapter regarding the potential linkage between ben- efits and valued outcomes such as employee satisfaction and productive behaviors, and one might assume that such outcomes are positively correlated with the actual amount and type of benefits offered to employees. Interestingly, research has been unable to clearly establish such a relationship (Dulebohn et al., 2009). Thus, in designing a benefits program it appears reasonable to employ the strategic HRM model wherein the goals of the program align with the strategic, tactical, and operational goals and objectives of both the organization and the HR department. For example, longevity benefits such as retirement plans are consistent with the HR goal of reducing turnover and increasing commitment, which in turn is consistent with the organizational goal of stability. As another example, work-life benefits are consistent with the HR goal of increasing diversity—a goal that is consistent with organizational goals of expanding into new markets. Setting specific goals for benefits programs can therefore help organizations achieve all these goals.

Discussion Questions 1. What types of voluntary benefits and flexible work arrangements do you receive in your current

workplace, or have you received from previous employers?

2. Estimate the costs of these benefits to the organization. Do not forget to account for the internal costs of administering and coordinating these benefits, as well as any opportunity costs such as lost productivity.

3. Estimate the gains from these benefits to the organization. First, focus on the qualitative gains (e.g., improved morale and commitment), then estimate the quantitative gains in terms of improved productivity, health, wellbeing, and retention.

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Figure 10.1: Benefits and benefits administration

f10.01_OMM618.ai

Selection and job fit

Benefits and benefits

administration

Program goals

Monitoring costs

Participants

Communication

Assessment

Monitoring utilization

Performance appraisal

management

Attraction and

recruitment of talent

Compensation and incentives

Strategic HR planning

Training and development

Job analysis and job design

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Setting goals also helps employers monitor a benefits program to assess whether it accom- plishes its purposes. For example, goals such as increasing talent retention or controlling health care costs have important, relevant, and quantifiable outcomes; measuring these outcomes makes it possible to evaluate the success of a benefits program. Indications of success can be used to justify maintaining or expanding the program, while indications that the program is not meeting its goals signal the need for change. This change may take the form of further communication to boost awareness of the program (e.g., in the case of underutilization), of adapting the program to better meet needs (e.g., switching to a cafeteria plan), or of elimi- nating some unnecessary benefits (e.g., switching from on-site childcare or fitness facilities to discounted memberships with third-party providers). Unfortunately, many organizations fail to set program goals, despite their importance.

Participants

A benefits program’s main purposes are to attract, motivate, and retain talent. Employees appreciate benefits that they are likely to use and that are beneficial for them. Accordingly, it can be useful to consult employees to determine whether a certain benefit is needed and would meet their expectations. In fact, many organizations allow employees to be part of committees that administer, interpret, and oversee benefits policies. Another way to support this participation is to gather employee input through opinion surveys. Whatever method is used to encourage employee participation in designing the benefits program, this participa- tion enables organizations to satisfy employees’ wishes and needs and improve employee satisfaction.

Communication

Every benefits plan requires a well-designed communication plan. A benefits package will be able to attract, motivate, and retain talent only if its recipients perceive its quality and useful- ness. If employees are unaware of the benefits available to them, or if the benefit administra- tion process is too complicated, then many benefits will go unnoticed or unused and therefore be of no value to employees. To realize the strategic value of benefits, an organization should therefore proactively and carefully design and implement its benefits package and then make sure that current and potential employees understand the package and the value it adds.

For example, in 2002, Prudential Financial Services Group rebranded and reorganized its offer- ings to its customers. That year, it also launched a new, flexible benefits package for its employees—a package that reflected the company’s offerings to its customers. The commu- nication strategy for this program was to give employees control over their financial futures through teaching them the same step-by-step financial planning process that Prudential cus- tomers would use. The organization’s goal was to offer this program to better meet customer needs, and the parallel HR goal was to get employees on board by educating them about the company’s offerings and also by training employees to use these offerings for their own financial planning. The result was that employees were able to draw on their own first-hand knowledge to inform customers about the company’s financial planning process. Thus, orga- nizational, HR, and benefit goals were aligned and integrated through a robust communica- tion strategy (Salkey & Thatcher, 2004).

Generally speaking, employees do not recognize the cost of the benefits they receive unless employers communicate this information to them (Hennessey, Perrewe, & Hochwarter, 1992; Wilson, Northcraft, & Neale, 1985). Clear communication enables employees to appreciate

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their employers’ substantial investments to meet their needs, and this appreciation helps employers attract, motivate, and retain talent. These are the reasons that many employers now offer their employees benefits statements, which translate the benefits an employee receives into dollar amounts. Adding these dollar amounts to the employee’s pay and other financial rewards in a visible, easy-to-comprehend format presents an accurate picture of the value of the organization’s compensation and investment in the employee.

Many kinds of communication can be used to inform employees about their benefits, including

• face-to-face training

• one-on-one coaching

• videos

• newsletters

• electronic alerts

When employers design a benefits communication plan, among the factors to consider are the available resources and the content, timing, and frequency of the messages (Kisilevitz, Debgupta, & Metz, 2006). The following section illustrates the importance of another essen- tial aspect of communication about benefits: the supervisor’s support for the benefits’ use.

A M O M E N T I N T H E L I F E O F A N H R M A N A G E R

Managerial Support Is the Most Important Component of the Benefits Package

Jenny, Tom, Ryan, and Sarah have known one another for years. They went to high school together, went to the same local college, and met up every Saturday until their successful careers took them to different cities. However, they still lived within driving distance of one another, and they main- tained contact and initially made a point of getting together at least once a month at their favorite local restaurant in their hometown. They promised one another that they’d continue to get together even as their families and careers developed.

However, over time, these promises seemed to get harder and harder to keep as family, work, and hectic schedules took up more of their time. After several years of being unable to get together, they finally reunited one Thanksgiving and brought all their families back to their hometown. With the children tucked into bed at their grandparents’ houses, Jenny, Tom, Ryan, Sarah, and their weary spouses were able to sneak out for a few late-night drinks. It was their first time all together as cou- ples. They were extremely excited to pick up where they’d left off. However, as their conversation progressed, the four old friends began to realize how their work-life imbalances had caused them to drift apart.

Ryan: I’m willing to bet you everything I’ve got that I have the worst boss in the world.

Tom: You’re on. No boss can compare to mine when it comes to making sure everyone’s life is as miserable as his.

Tom’s wife: It’s true. Tom’s boss makes sure everyone’s spouses and kids are miserable, too. The guy doesn’t have a life: he’s practically married to his job and wants everyone around him to be just like him.

(continued)

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Studies show that the simple availability of benefits does not determine their use or value, which lie instead in employees’ perceptions that their supervisors acknowledge that a work- life balance is important for psychological well-being. Employees must also perceive this value in their organization’s culture (O’Driscoll et al., 2003). Thus, it is better for an employee to

Jenny: At least you both have a boss. You know what you’re supposed to be doing. Sometimes I wonder if it would have been easier to work for somebody than to be my own boss.

Sarah: It is hard to work for a small business, whether it’s yours or someone else’s. The other day, I had to vacuum the whole office myself because it was so filthy and the owner can’t afford to hire a professional cleaning crew. That’s definitely not on my job description as a sales manager, but I just couldn’t keep looking at those dust bunnies in every corner. They were unbearable.

Sarah’s husband: But your boss is so appreciative for everything you do; she practically treats you like family. Even though the business can’t afford to give you a lot of the perks that large companies give, at least she’s really understanding and accommodating. Remember when Emma was at the hospital? She let you work from home that whole month. She came to check on you every night after work and even brought us a few meals. You’d never get that from my boss. He’s always reluc- tant to give me time off. He gave me a hard time even on the day of Emma’s surgery, and he made sure he reminded me the next day to take it out of my vacation balance. I’d do anything to have a boss as understanding and considerate as yours.

Sarah: True. I know I shouldn’t complain. Sometimes it’s just hard to watch my friends who work for big successful companies fly all over the place, stay at fancy hotels, and go to amazing business functions without paying a penny for it while I have to buy my own office supplies sometimes.

Tom: Sarah, none of those perks are worth anything if you don’t have a supportive manager. I work at one of those dream companies you’re talking about. Do you know how many days of vacation I’ve accumulated so far? A hundred and fifty-five! That’s over five months of vacation! And you know why? Because every time I submit a request for a vacation, my boss turns it down, saying I’m needed at the office. The single time he did approve my vacation—a time I’d submitted the request months in advance—he canceled it the day before with some dumb excuse about a crisis situation at one of our sites that he could have handled himself. We had to waste all our nonrefundable reserva- tions for our family dream vacation. My boss feels like he owns me somehow. He’ll call me in the middle of the night and schedule meetings on weekends and holidays. So far, I’ve missed my sister’s wedding and several of my kids’ birthdays. I have to sneak out if I want to eat my lunch in peace, because he’ll call me into his office the minute he sees me heading for the cafeteria. He even made fun of me when I applied for paternity leave under FMLA when Billy was born. Is that even legal? My wife was on bed rest, and we had two other kids to take care of.

Ryan: You win, Tom. My boss isn’t that bad, but he’s still not as supportive as a lot of other manag- ers in the company. For example, he wants to know where you are every minute of the day, and he micromanages everyone like we’re in kindergarten. It’s like he doesn’t trust us at all. But you know, we get back at him all the time. I’ve been submitting the same route every day for the last three months in a row, and he hasn’t even realized it. I don’t have time to keep accurate records of where I am, and I’m not paid to do that. All of us cover for each other when we have to. I know it’s not right, but the work does get done, and the company stays profitable. I do a good job, but I’d never go out of my way to do anything extra. My boss wouldn’t appreciate it anyway, and he might even ask me why I did a good job without checking with him first! He’s incapable of treating anyone as a responsible adult.

Sarah: I guess I’m lucky to have a boss who supports me and appreciates me as a person. I just hope we can afford to hire a cleaning crew next year!

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work for a supportive supervisor and organization, even if the organization offers limited ben- efits, than to work for an organization that has a wide range of benefits but a supervisor who does not support the employees’ choices to utilize those benefits. In fact, over time, perceived support from supervisors has been shown to directly influence employees’ perceptions of organizational support, which in turn predicts employee retention (Eisenberger, Stinglhamber, Vandenberghe, Sucharski, & Rhoades, 2002).

Monitoring Costs

To be successful, a benefits program should be affordable for both the employer and the employee. Thus, cost containment is crucial for any benefits program’s success and sustain- ability. Costs should be constantly measured and monitored. It’s also critical to select and apply the right strategies for cost containment. For example, the costs of health care have been increasing exponentially, and many employers have therefore reduced expenses by reducing their benefits or shifting most of the cost increases to their employees. However, research shows that these strategies are counterproductive and can have negative effects on organizational performance (Towers Watson, 2010).

There are more effective ways to reduce costs. For example, Safeway, a U.S.-based supermar- ket chain, has been able to maintain its health care costs for several years even though U.S. organizations have experienced an average cost increase of 40%. Safeway accomplished this cost containment through emphasizing health, wellness, and preventive care. Four specific health conditions—cardiovascular disease, cancer, diabetes, and obesity—have been recog- nized to account for 75% of health care costs. Safeway focused its energy and resources on monitoring, preventing, or managing the root causes of those four health conditions through health promotion initiatives such as smoking cessation and weight control. As a result, the company was able to significantly reduce insurance premiums, rather than reducing coverage or passing costs on to employees (Strassel, 2009).

Milkovich et al., (2011) note that a recent approach to controlling benefit costs is for employ- ers to suspend contributions that match (up to a set percentage) contributions that employees make to their 401(k) retirement plans. While the average company match has been 50 cents on each dollar contributed by the employee up to 6% of pay, recent survey data suggests that about one in four employers have already suspended their matching contribution or are considering doing so.

Finally, as demonstrated by the ongoing influence of the recession of 2008, many employers have turned to reductions in force (RIFs) to cut labor costs. To the degree that a RIF is based on performance and results in retaining stronger performers, its major advantage is reduction in the cost of benefits while retaining the services of the most talented and motivated employ- ees. Thus, stronger performers are unaffected (i.e., their pay and benefits are not cut), and the organization has the opportunity to maintain positive employee relations with its most productive employees (Milkovich et al., 2011).

Monitoring Utilization

For a benefits program to be successful and cost effective, it needs to realize economies of scale; the cost per participant will therefore be lower than if employees independently purchase the benefits. When employers negotiate with providers, they are able to secure discounted group rates for their employees. Furthermore, offering some benefits in-house, such as a discounted meal plan at the company cafeteria, may reduce costs by using existing

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facilities and resources. Some benefits increase in quality and effectiveness the more they are used. For example, on-site child care may not be conducive to a qual- ity developmental experience if only a few employees enroll in the program, result- ing in limited social interaction for the children. Similarly, on-site fitness classes may not be as motivational if only a few employees attend them.

Some benefits can also result in tax con- sequences for the employer or employee; these consequences can affect the cost, affordability, and utilization of various benefits. For example, health insurance premiums and retirement plan contri- butions are deducted on a pretax basis, which is advantageous for both the employer and the employee. On the other hand, if tuition reimbursement exceeds certain limits, it is considered additional compensation for tax pur- poses, which can significantly reduce the employee’s income after taxes.

Monitoring the utilization of each benefit can be complicated and time-consuming, but tech- nology can facilitate this process. For instance, Internet-based systems have real-time tracking as employees sign up for, change, or update their benefits options. It is crucial to monitor and analyze trends and changes in utilization because these processes ensure that a benefits package continues to meet diverse and changing employee needs.

Assessment

Due to the skyrocketing cost of benefits, organizations need to periodically assess and evalu- ate their benefits programs to be able to determine the programs’ payoffs. Various HR metrics can be used for this purpose, including

• benefits as a percentage of payroll

• benefits expenditures per full-time equivalent (FTE)

• benefits costs by employee group

• the return on expenditures, which can be applied to different programs that an employer offers (Fitz-enz & Davidson, 2002)

It is crucial that benefits be assessed not only in terms of costs, but also in terms of returns such as improved attraction, motivation, and retention of talent. It is also crucial to gauge increases over time in employee productivity and organizational performance and effective- ness. The immediate costs may be high, but a long-term assessment of the returns can help reveal which costs are conducive to the highest returns.

Moreover, benefits should be evaluated on the general as well as the specific levels. Individually, the emphasis should be on the benefits that yield the most strategic outcomes consistent with the organization’s goals and objectives. However, some benefits may also yield synergies. For example, as Safeway discovered in the example above, health-promotion initiatives can result in lower health insurance premiums. Therefore, even if health-promotion programs are costly,

Christopher Futcher/E+/Getty Images

▲▲ Some benefits, such as on-site daycare, increase in quality the more they are utilized.

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the returns on these investments should be assessed in conjunction with the reduced health insurance costs. On the other hand, some benefits may render other benefits redundant or may at least make it necessary to revise or adapt them. For example, telecommuting and other flexible work arrangements may reduce the utilization and cost-effectiveness of on-site childcare or fitness facilities. Instead, the organization may want to consider partially or fully reimbursing employees for the costs of obtaining these services on their own through a more convenient provider of their choice.

10.5 Linking Benefits to the HRM Process Benefits should be integrated with the overall HRM process so that they serve as a strategic source of competitive advantage. This integration should in turn be aligned with the organiza- tion’s goals and objectives, as well as the realities of its industry and the market in general. For example, the benefits an organization offers should be selected in light of the benefits competitors offer, and this comparison should be a component of the HR planning process. Similar to compensation, an organization makes a strategic choice to offer more, fewer, or the same benefits as its competitors. Each of these approaches has its advantages and limitations.

Benefits should also be consistent with the nature of an organization’s jobs. For example, dangerous or hazardous jobs may make it especially necessary for an organization to pro- vide health, life, and disability insurance. A benefits package should also be designed for the particular group of candidates whom an organization aims to attract. The more diverse the group of current and potential employees is, the more diverse and flexible the organization’s benefits should be.

Because benefits then become an integral component of the overall compensation and rewards package that an employee receives, they should be considered in conjunction with other compensation and rewards decisions. Employee motivation will likely be shaped by the perceived rewards package as a whole, rather than by the monetary value of one specific benefit to the exclusion of others. For example, many employees view training or promotion opportunities as more important than other benefits, or even than the level of compensation they currently receive. Thus, benefits decisions should also be made with the organization’s compensation, training, and promotion processes in mind.

10.6 Opportunities, Challenges, and Developments in Benefits and Benefits Administration

Economic Challenges

As mentioned earlier in the chapter, benefits costs are rising rapidly. Health care benefits are rising especially steeply, which places a huge burden on employers, employees, and the whole nation. These rising costs challenge employers’ ability to build a sustainable human-based competitive advantage. According to a 2007 U.S. Chamber of Commerce study, the cost of employee benefits represented about 42.7% of total payroll. More than 168 million Americans receive health insurance through voluntary benefit plans sponsored by their employers. Unless the costs of those benefits are properly managed, employers may drop those plans, shifting the costs to the employees who will likely turn to the insurance exchanges established by PPACA. The impact of such a scenario on public policy remains to be determined.

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Similarly, the current economic recession has rendered many employees’ retirement goals and plans unattainable. Employees, their employers, or both would have to invest significantly more toward employees’ retirement if employees are to retire and maintain their cur- rent standard of living or reach the standard they aspire to. This shift would leave much less discretion- ary income and resources to invest in other benefits. The rising costs of benefits will continue to be a chal- lenge as the market becomes more competitive and the war for talent continues.

Demographic Trends

As the U.S. workforce becomes more diverse, employees have more diverse needs and expec- tations for their benefits. This diversity has led organizations to look for new ways to design benefit programs that attract, motivate, and retain diverse talent. Consider the following trends (Cascio & Boudreau, 2011):

• Younger workers view flexible work arrangements and the opportunity to give back to the community as more important than pay.

• The number of women in the workforce today is almost equal to the number of men, and their aspirations for growth opportunities and increased responsibilities are similar to men’s.

• About 80% of couples are dual career earners, with women contributing on average almost half of the family income.

• About 70% of mothers of school-age children are employed, and 55% of mothers of infants younger than one year old are employed.

• One in three children is born to a single mother.

• One in five single-parent households is headed by the father.

• Fathers in general, and especially fathers in dual-career couples, are taking more child- care responsibilities.

• About 70% of men reported that they would take a pay cut in order to spend more time with family, and 50% reported that they would turn down a promotion if it would take away from family time.

Organizations need to be responsive to these trends and to the changing needs of their employees. It is of the utmost importance that organizations tailor benefits programs to a highly diversified workforce. Organizations must also accommodate different lifestyle needs if they are to attract highly capable employees and reduce current employees’ stress from work-life conflict. However, it is becoming a challenge for organizations to design benefit pro- grams that are able to reflect constant societal changes, meet the different needs of different employees, and remain cost efficient.

Bloomberg via Getty Images

▲▲ Millions of Americans receive health insurance through plans sponsored by their employers.

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Unions and Benefits

While private sector union membership in the United States has declined from 34% of men and 16% of women in 1973 to less than 8% men and 6% of women today (Western & Rosenfield (2011), unions continue their tradition of having a considerable impact on benefits. Unions help employees become better informed about benefits; they secure legislated labor protections and rights and also enforce them on the job. These rights include, but are not limited to, the rights to family and medical leave, overtime, safety, and health care (Mishel & Walters, 2003). Unionized employees are also more likely to receive a wider range of benefits than employees outside unions (Buchmueller, DiNardo, & Valletta, 2002; Budd, 2004). These benefits can include better pension plans, with a higher contribution from the employer’s side; health benefits with lower health care deductibles and smaller employee contributions to indi- vidual and family premiums; and more vacation time and paid leave (Mishel & Walters, 2003). However, unions are protesting the impact of the PPACA on union membership. The AFL-CIO claims the statute imposes additional costs and fees on union members with no resulting ben- efits. For instance, the statute adversely impacts multi-employer bargaining agreements by allowing small companies to continue avoiding responsibility for employee health care cover- age; further, the statute imposes the 40% excise tax on many legally negotiated union health care plans. Facing this reality, unions foresee pressure to shift costs to workers, cut wages, and agree to unacceptably high deductible plans resulting in millions of workers and their families being forced into the exchanges (Roy, 2013).

Benefits for Part-Time Employees

Benefits for part-time employees are an important consideration when an organization designs a benefits plan. Not all organizations offer benefits to employees who work part-time. In fact, according to the Bureau of Labor Statistics (2011), only a small number of part-time employ- ees are eligible for health care benefits, and only about one-fourth are offered retirement benefits. Benefits offered to part-time employees are often prorated as a percentage of full- time work, which usually burdens part-time employees with a prohibitively expensive share of the costs of those benefits. For example, an employee who works 20 hours a week may be offered health insurance, but the employer would only contribute half of what it would pay for a full-time employee to get coverage. An already low-paid, part-time employee might have an unaffordable premium—a situation that often results in the employee’s not signing up for those benefits and therefore going without coverage.

Web Links

Walmart and Health Care Coverage http://www.youtube.com/watch?v=uFTHaUDWWxs

Health Care Coverage Challenges http://abcnews.go.com/wnt/video/walmart-cuts-health-care-employees-14790554

Walmart has received significant criticism for relying too much on part-time workers and on low pay that keeps eligibility and access to health insurance out of reach for many of its employees, thus

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http://www.youtube.com/watch?v=uFTHaUDWWxs

http://abcnews.go.com/wnt/video/walmart-cuts-health-care-employees-14790554

Opportunities, Challenges, and Developments in Benefits and Benefits Administration Chapter 10

Offering benefits to part-time workers can help organizations attract and retain workers in markets where there is insuf- ficient talent or where the desired talent is not available on a full-time basis. For example, UPS and Wegman provide health insurance benefits to part-time employees at no cost. In this way, they are attracting mothers, retirees, and others who want to supplement their income or coverage until they are eligible for retirement ben- efits (Demby, 2003).

Outsourcing Benefits

Most organizations now outsource some or all of their benefits activities due to pressures arising from the complexity, escalating costs, and changing legislative and regulatory rules associated with benefits design and administration. These increasing pressures are added to the ever-present pressure to perform with limited resources. Outsourcing some or all benefit functions helps organizations make these processes more efficient, saves time, and reduces administrative costs.

Some of the most frequently outsourced benefit activities are medical, dental, and vision claims processing, as well as administrative activities associated with retiree benefits. Employee assistance programs (EAPs) are also often outsourced to help maintain perceptions of confi- dentiality, which encourages employees to participate in those programs. Cost considerations are important, but they should be balanced with the returns on those decisions and assessed through a strategic perspective. These considerations apply to most HR decisions in general and to benefits decisions in particular. For example, cost reductions from outsourcing benefits administration should be weighed against reduced quality and control, violations of employee privacy, and other potential risks.

overburdening public assistance health care programs. Walgreens’ decision to cut back on health care coverage in reaction to the requirements of the new PPACA has also been criticized as disad- vantageous to employees.

Discussion Questions 1. What are your views about health care coverage? Should it be the responsibility of employers,

employees, or the government to provide health care?

2. What are the implications of your choice in terms of profitability, employment opportunities, tax rates, and impact on the federal government’s budget?

3. Research examples of countries with various health care systems. What are the similarities, differ- ences, advantages, and drawbacks? What are some lessons that can be learned and applied to improve health care coverage in the United States?

Bloomberg via Getty Images

▲▲ Providing health insurance benefits to part-time employees helps companies like UPS to attract and retain quality workers.

Summary and Resources Chapter 10

Summary and Resources As was true in our discussion of pay in the last chapter, employers tend to focus on the costs, as well as the legal and administrative implications, of benefits-related decisions. However, it is also important to pay attention to the strategic role of benefits in terms of attraction and retention of talent, which can yield a handsome return on investment. Pay and benefits work together as a package to “sell” an employer to applicants, and they also work to keep current employees satisfied, rewarded, and motivated as well as healthy and productive.

Post-Test

1. Which of the following is NOT one of the mandatory benefits?

a) Workers’ compensation

b) Social Security

c) Severance pay

d) Jury duty leave

S P O T L I G H T O N E V I D E N C E - B A S E D H R M

Benefits That Produce Results

Meta-analytical research supports the efficacy of some specific, voluntary employer-provided bene- fits. For example, more than a decade ago, Baltes and colleagues (1999) found support for a positive relationship between flexible work arrangements such as flextime and compressed workweeks with numerous desirable work outcomes such as performance, satisfaction, and absenteeism. However, the effects varied among the types and degrees of flexibility. Thus, each organization needs to design the program that best fits its strategic objectives.

More recently, Baicker, Cutler, and Song’s (2010) meta-analysis showed a reduction in medical costs of about $3.27 and a reduction in absentee day costs of about $2.73 for every dollar spent on wellness programs. Thus, investment in wellness programs is not only good for the employees and beneficial in terms of promoting the organization’s reputation and attracting talent, but it also has a direct impact on the bottom line and a significant return on investment that justifies the associated costs of these initiatives.

Discussion Questions 1. What are some of the advantages and challenges of flexible work arrangements to employers

and employees? How can some of these challenges be mitigated?

2. Recall from experience or research examples of effective wellness programs. What were some of their characteristics? How might they have contributed to medical costs reductions?

3. How can some of these initiatives be implemented in your current workplace? What could be some of the challenges?

References Baicker, K., Cutler, D., & Song, Z. (2010). Workplace wellness programs can generate savings. Health Affairs, 29, 304–311.

Baltes, B. B., Briggs, T. E., Huff, J. W., Wright, J. A. & Neuman, G. A. (1999). Flexible and compressed workweek schedules: A meta-analysis of their effects on work-related criteria. Journal of Applied Psychology, 84, 496–513.

Summary and Resources Chapter 10

2. is a phenomenon that refers to employees who report to work while sick but have low productivity.

a) Presenteeism

b) Attendance

c) Tardiness

d) Absenteeism

a) A pension plan

b) Social Security

c) Workers’ compensation

d) Severance pay

4. Which of the following is NOT one of the characteristics of an effective benefits program?

a) It should give employees the services they actually want and need.

b) It should be affordable for both the employee and the employer.

c) It should put more emphasis on organizational needs.

d) It should help recruit and retain quality talent.

5. Which other HRM processes should be kept in mind when making decisions about plan- ning benefits?

a) Training, severance, and overtime.

b) Flextime, unique assignments, and promotion.

c) Social Security, unemployment insurance, and compensation.

d) The overall package of compensation and rewards.

6. Unionized employees usually receive the same range of benefits as those who are non- union members.

a) True

b) False

7. Which of the following is NOT true about workers’ compensation?

a) It provides financial compensation.

b) It covers employees injured in the course of employment.

c) It covers rehabilitation services.

d) Its cost is shared between employees and employers.

8. Benefits do NOT help employees satisfy which of the following basic needs?

a) Maslow’s physiological needs

b) Alderfer’s existence needs

c) Vroom’s expectancy

d) Herzberg’s hygiene factors

Summary and Resources Chapter 10

9. What type of benefit is offered in the form of defined-benefit or defined-contribution plans?

a) Health care

b) Pension plan

c) Social Security

d) Severance pay

10. Which of the following is the LEAST effective strategy for reducing the costs of health care benefits?

a) Emphasizing health and wellness

b) Managing the root causes of the most common health conditions

c) Shifting most of the cost increases to employees

d) Emphasizing preventive care

11. Benefits decisions should focus primarily on compensation.

a) True

b) False

12. Which of the following is NOT true about the current demographic trends in the workforce?

a) There are almost equal numbers of women and men in the workforce today.

b) About 70% of men reported that to spend more time with family, they would be will- ing to take a pay cut.

c) About 80% of couples have single income households.

d) One-third of children are born to single mothers.

Answers 1. c) Severance pay. The correct answer can be found in Section 10.1.

2. a) Presenteeism. The correct answer can be found in Section 10.2.

3. d) Severance pay. The correct answer can be found in Section 10.3.

4. c) It should put more emphasis on organizational needs. The correct answer can be found in Section 10.4.

5. d) The overall package of compensation and rewards. The correct answer can be found in Section 10.5.

6. b) False. The correct answer can be found in Section 10.6.

7. d) Its cost is shared between employees and employers. The correct answer can be found in Section 10.1.

8. c) Vroom’s expectancy. The correct answer can be found in Section 10.2.

9. b) Pension plan. The correct answer can be found in Section 10.3.

10. c) Shifting most of the cost increases to employees. The correct answer can be found in Section 10.4.

11. b) False. The correct answer can be found in Section 10.5.

12. c) About 80% of couples have single income households. The correct answer can be found in Section 10.6.

Summary and Resources Chapter 10

Key Ideas

• Benefits are crucial to attract, motivate, and retain talent and to cater to the needs of a diverse workforce.

• Mandatory benefits include workers’ compensation, Social Security, PPACA, COBRA, HIPAA, and FMLA.

• In addition to mandatory benefits, many employers also offer a wide range of voluntary benefits such as severance pay, health insurance, retirement plans, and paid time off. Work-life benefits and flexible work arrangements are also becoming increasingly com- mon. “Cafeteria plans” give employees flexibility to choose the benefits that best fit their needs and lifestyles.

• Organizations make huge investments in benefits programs, and the costs of benefits are increasing exponentially. Thus, the costs and returns on investment in various ben- efits should be regularly assessed to improve strategic benefits decisions.

• Effective benefits programs should have specific goals that are aligned with organi- zational objectives. These programs should involve a wide range of participants and should be accompanied by a robust communication plan. Organizations should regu- larly monitor costs and utilization, periodically assess benefits programs’ effectiveness, and adapt benefits to fit changing employee needs.

• Employers and employees rarely consider benefits in isolation. Benefits are intricately connected to various HR functions such as HR planning, recruitment, selection, training, and compensation.

• Challenges in the area of benefits and benefits administration include escalating costs, changes in employee needs that result from increasingly diverse workforces, and chang- ing laws and regulations.

Key Terms

benefits Compensation apart from wages and salaries that are often provided by employ- ers to employees over and above their normal wages and salaries.

cafeteria plan A flexible benefits plan that allows employees to select a combination of benefits from a pool of choices, according to their own preferences but within some overall limits.

Consolidated Omnibus Budget Reconciliation Act (COBRA) A mandatory benefit that extends health care benefits to employees who leave their employers.

defined-benefit pension plan A retirement plan in which the employee receives fixed benefits upon retirement based on the amounts invested by the employee, the employer, or both regardless of the performance of the investment pool.

defined-contribution pension plan A retirement plan to which the employee, the employer, or both make fixed contributions. In this case, however, the final amount received by the employee upon retirement depends on the investment’s performance.

The Federal Jury System Improve Act An act that prohibits an employer from discharg- ing, threatening to discharge, intimidating or coercing any employee based on the employ- ee’s jury service.

Summary and Resources Chapter 10

Health Insurance Portability and Accountability Act (HIPAA) A mandatory benefit that ensures the security and privacy of health information and grants employees the right to replace their health insurance plans after changing employers or losing jobs, regardless of pre-existing health conditions.

health maintenance organization (HMO) A voluntary health care benefit plan offered by employers; the plan connects employees with contracted primary-care physicians, who provide most of the care and treatment needed and refer patients to contracted specialists only as needed.

mandatory benefits Benefits that employers are required to provide by law.

paid time off (PTO) Voluntary benefit that is offered by many employers but is not legally required by federal and most state statutes.

pension plan A retirement plan offered voluntarily by an employer and funded by both the employer and employee; under this plan, the employer’s contributions go toward the employee’s pension pool of funds.

preferred provider organization (PPO) A managed care organization of doctors, hospi- tals, and other health care providers that makes a covenant with an insurer to provide health care services to employees or members at reduced rates.

presenteeism Employees reporting to work while sick—being present, but unproductive.

severance pay Payment offered voluntarily by employers to employees upon termination of employment.

social security Mandatory retirement benefits for previously employed individuals, the cost of which is shared between employees and employers.

unemployment insurance Mandatory retirement benefits that provide a floor of coverage for individuals who become unemployed through no fault of their own.

The Uniformed Services Employment and Reemployment Rights Act An act that pro- vides an employee who gives proper notice of the need for military-related absence protec- tion from discrimination or retaliation.

workers’ compensation A mandatory form of insurance that covers situations when a person is injured in the course of employment.

Critical Thinking Questions

1. In attracting and retaining employees, is it more advantageous for an organization to match the benefits of their industry or focus on unique offerings?

2. Some organizations combine all employee leave days into one PTO category, while others separate it out into sick leave, vacation, holidays, etc. Do you believe one method to be better than the other?

Summary and Resources Chapter 10

3. What are the possible negatives to allowing employees flextime (i.e., setting their own schedules, as long as they work the required number of hours)?

4. How would you evaluate the effectiveness of an organization’s health care benefits? That is, what different perspectives or metrics should be considered?

5. How do you think employees can have a role in lowering health care costs? How could organizations encourage this?