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Compensation and Strategy: Controlling Benefits Costs

Introduction

According to Pauly, 1997 employers would want to devote much managerial effort to containing premium increases. Yet, many employers clearly have devoted resources to this end over the years, suggesting that they hold a different view. Their perspective (which Pauly terms the “business model”) places emphasis on health benefits as a cost center within each firm to be monitored and aggressively managed. If an employer could cut expenditures for health benefits, or control their rate of increase, and its competitors in the product market could not, it could lower product prices, increasing market share and profits. These gains might be short term in nature if other firms have access to the same cost containment approaches, but nevertheless they may be worth pursuing. Labor market considerations are seen as important constraints on employer cost containment efforts, but the goal of cost control is paramount.

Pauly, 1997 continues that ‘local health benefits managers may wish to manage health benefits to make them more attractive to potential employees, or to reduce costs, but they are severely constrained in doing so.

A good compensation scheme when used as a strategy by an organization aims to give rewards for the right employee behaviour. When employee achievements of the desired results are rewarded it becomes a motivator and this enhances effectiveness thereby increasing success possibilities. Compensation scheme can also be used to reinforce a desired organization culture and the compensation policy must replicate strategic business objectives. Organizations may use both financial and non financial rewards in their scheme. One such benefit is employee health insurance and when strategically used it has the ability to assist the employer and employee in various ways. However the provision of medical insurance is costly and organizations have to constantly look for ways to contain the spiralling health insurance costs to remain competitive in the industry. Most organizations seek to maximise the profitability and revenues and to have a good profit margin they must be able to constantly make cost savings.

Discuss how health insurance benefits might impact the organization’s overall strategic goal-setting process.

Quality manpower is an important asset for any organization .The provision of health insurance has great impact on organization’s overall goal setting process. Once an organization has attracted quality employs into its workforce it is important that it continues to provide quality health insurance so that the existing employees are not attracted to what is on offer by the competitors. Therefore the company is able to retain its valued manpower.

Increased productivity and reduced absenteeism. When the employees are provided with health insurance benefit they are a satisfied lot for they know for they know they are covered for any eventuality and they are able to attend and work to their full potential. The preventive care measures taken by employees help them avoid potentially more serious health problem and therefore the sick off days that would have been taken while sick is utilized in gainful production leading to increased productivity. Employees with the health benefit cover are normally a happy and productive workforce for they feel that the employer values the people who work for him. This makes them loyal and more productive.

When employers pay premiums for health insurance, the full amount paid as premium is not taxed. This therefore means that they pay less tax and use the rest of the money to motivate their employees. Similarly when employees obtain cover through the employee, their share of premium contribution is deducted before taxation compared to when he would have paid with after tax pay check. This reduces the amount of pay that is subjected to tax and ends up paying less tax which is a saving and there fore employees feel appreciated and produce more.

When a health insurance is provided for as a group, the rates are lower compared to those of individual health care. Employees are able to make some savings on the premium amounts that would otherwise have been made. This is likely to make them more loyal and productive as they feel appreciated. There are times when employees are provided with health savings account. This offers a flexible way for employers to provide health insurance to employees while minimising costs. The cost of providing health insurance are high and employers must look for various tactics can help reduce costs in order to remain competitive.

When the employers provide health insurance to employees then they are understood and their needs respected since it is risky operating without cover. The show for the concern going without is feel that they are clearly understood by an employer who provides health insurance as going without is risky. The feeling for respect to the employer boosts their morale and productivity.

Discuss how a business can control its health insurance benefit costs while using the benefit package as a recruitment and retention tool. 

According to MetLife’s 8th Annual Study of Employee Benefits Trends, controlling benefits costs is now the top objective of most employers, overtaking employee retention, which has been the top objective since 2006. In addition, increasing employee productivity is now of key concern in employers’ minds as they seek a competitive advantage .Most organizations struggle while attempting to provide acceptable health benefits to workers due to the high costs of premiums. It is therefore vital that companies both large and small be able to contain the premium costs paid for the employees since the benefit is a boost to employees’ morale and sustain positive working environment. Healthy workforce constantly deliver quality, have little or no absenteeism and are likely to remain with a company for a long period if the benefits provided are better than those offered by competitors . Organizations can reduce health insurance costs in a number of ways.

According to David Kwasny president of Restat, an Independent pharmacy benefit manager (PBM) in a comprehensive analysis of spending Study “The value The Value of Alternative Pharmacy Networks and Pass-Through Pricing, a recent report commissioned by Restat and conducted by Milliman Inc, companies with 5,000 to 6,500 employees can save up to $2 million annually if they create plans that use preferred pharmacy networks and favor generic drugs . T he report attributes lower costs under an alternative pharmacy network (APN) model to the fact that the PBM and retail pharmacy retain less revenue compared to a traditional model. In all scenarios and regardless of the benefit design the net claim for the APN was lower than the cost for the traditional PMB with net claim costs lowest where there was greatest network penetration or use of the APN. Significant price differences were noted and depending upon benefit design and degree of penetration achieved employers costs were 4%-13% lower. When compared to the traditional approach, the preferred pharmacy benefit network is clearly a better approach to managing prescription benefits, and one that offers greater transparency in services offered by PBMs by delivering savings directly from the pharmacy to the employer.” The use of generic medicine in the traditional and APN models reflected a 31% reduction .The use of branded medicine both in the traditional and APN model generated a reduction of 8% in the APN models hence the recommendation for the used of generic where possible to save on costs.

According to the Kaiser Family Foundation/Health Research & Educational Trust (2013) Employer Health Benefits Survey employers continue to see a rise in health insurance costs with Annual premiums for employer-sponsored family health coverage reaching $16,351 in 2013, up 4% from last year (2012). The reduction in employee health insurance costs requires a lasting dedication by the management to be achieved. Firms should ascertain urgent measures that can be put in place to contain cost while also identifying that have a with a fast impact . Firms should identify larger scale changes with immediate costs saving but lead to essential changes to approach in insurance. The report suggested enumerates seven strategies of cost reduction

Firms should identify immediate cost-reduction opportunities and implement changes that have a quick impact on the cost of health insurance. However, it is also important to identify larger-scale changes that not only result in immediate cost savings, but lead to fundamental changes in the way your company and employers approach health insurance.

Compile and use data: Employers should compile and use data on employees consumption of the health care services. This data acts as a tool in confronting the spiraling health insurance costs. This enable accurate planning based on actual figures and history.

Provision of monetary incentives for positive and preferred behavior: Workers are encouraged to change behaviours by being rewarded to embrace wellness options, living healthy and engagement in preventive care. This helps in keeping the employees away from the sickness and therefore reduce costs.

Avail resources to most expensive health care consumers as spending a little more on employees with chronic illnesses and other complex problems ailments require more health care resources thus reducing overall cost of health benefit.

Moving employees to consumerism not only helps reduce the cost of health insurance for employers, but it also encourage employees to be more engaged with their decisions and, as a result, reduces overall health costs for employer and employee. Changing health insurance program. Plan design and vendor assessment is an obvious place to start when addressing health insurance, since changing plans or vendors, or simply making alterations to existing plans often can result in significant changes. Unfortunately, such changes often have only short-term impact, and too many organizations stop there.

Where applicable employers should promote on-site services. On-site services not only lower costs to employers, they also make it easier for employees to participate in screenings, preventive care, and more. And, as a result, can lower health costs for the employer and employee.

These strategies when well utilized should act as a guide and be blend with organization culture and in the end helps the organization realize health insurance cost reductions.

According to the Kaiser Family Foundation, 2010 “ the average cost of a traditional PPO plan in the United States was $5,584 per year for a single person—of which American companies paid 79 percent. For families, the average premium was $15,404 annually—of which employers picked up 74 percent. That means a typical 25-man employer group is paying nearly $200,000 a year for healthcare for their employees, and most dramatically, the difference between a five-percent rate increase and a 20-percent rate increase is $35,000 and compounding every year going forward.” The report noted “If the purpose behind health insurance is to attract and retain employees, and the employer is spending tens or hundreds of thousands of dollars, it is absolutely something that should be actively managed.’To address the rising costs the study reccomended the following measures:

The employer should provide incentives for employees to move away from negative behaviour so as to reduce costs. Eg paying employees premium for healthy BMI and keeping blood pressure under control. In addition employers can provide health clubs. By introducing the HSA/HRA account the underlying cost for the plan should be 25-35 % less than the tradional cost . Since the money is placed before tax and grow tax free and can be accessed upon retirement. When employees are spending their own money they go for the cost effective ways thereby helping the firm to safe on costs. Employers at times pay part of the premium for spouse and children to be on their plan.If the spouse has a cover at her place of work the employer can ilent a rule disallowing the coverage for the spouse for she is covered elsewhere. This saves on costs and eliminates claims risks.

Smokers cost their employer $4,000 per year and also miss more work when sick often and are not as productive as they take more breaks. Introducing a comprehensive program that eliminates smoking during work hours, assists them in efforts to quit and may help reduce smokers thus helping reduce costs. Offering drug discount programs such as that of Wal-Mart could have a dramatic impact on reducing your prescription costs. Walmart offers more than 300 generic drugs and over 1,000 over the- counter drugs for a four-dollar copay. With a little education from your broker, a few employee meetings, and some well distributed emails, your costs could be dramatically cut. As of 2009 emergency room visit was $1,318, while the average cost for physician was $199. ERs deliveries are four to five times more expensive than other types of delivery, the costs are going to explode,. Nowadays there is What a plethora of urgent-care facilities, clinics inside pharmacies and chain stores, and 24/7 nurse/physician hotlines that can be the first line of care for employees. This helps save costs. Proper benefit designs are at times costly. Benefits should be designed to guide workers to the lowest cost option such as visiting a generalist as opposed to a specialist who is expensive. Employers should shop more for insurance plan as competition brings more players and some give better rates leading to costs saving

Wellness programs ensure healthy employees and reduced visitations to the doctor. Employers can offer programs like online health risk assessment and blood profiles, cholesterol levels etc Employers should find ways to educate employees on their health, make them aware of concerns and motivate them to live healthier lives. Employers can utilize brokers who specialize in healthcare and one who can offer support while providing innovative ideas and utilizing technology.

PART 2

Employing the Contingent Worker:  Is it Worth It?

In the article, "Earnings and Benefits of Contingent and Non-contingent Workers", the premise of how a contingent worker, which has become a key foundation of US workforce, is compensated compared to regular workers. In this case assessment, compare and contrast the various aspects related to how contingent workers are compensated versus that of a regular worker. As you undertake this comparative analysis, address the following aspects:

Given the different levels of pay and total rewards, how may an organization create a sense of internal equity?

Contingent workers earn less than non contingent workers $285 compared to $ 416 for core employees. Majority of contingent work only part time and generally earn less than full time approximately 80% of non contingent workers. They work approximately 10% less hours than their counterparts. Most of them tend to be younger and are paid less .Variations exist in pay depending on their age. Younger workers and older contingent workers fare better relative to their non contingent counterparts than those aged 25 to 54. Most workers have lower levels of education than non contingent and many others are still in school. Those with less than high school diploma and those with associate degree earn the most relative to non contingent workers while high school graduates and those who have some college earn the least. Majority are heavily concentrated in the services industry and earnings are lower than for core employees. They are mainly in lower paying house hold jobs.Those in construction industry earn about the same as non contingent with parttime earnings of 69% compared to 108 % for fulltime. Those in the agriculture and retail Partime earn a higher proportion of non contingent compared to full time while those in precision production, craft and repair occupations earn about the same as their non contingent. Those in the managerial and professional specialty earn 87% of non contingent. The earnings of contingent workers are usually lower than for non contingent. The main reasons for the variations include differences in hours worked, age, education level and industry of employment would appear to account for some gap but more often than not contingent workers earn less than core workers.

Contingent workers are less likely to receive health insurance from employer. A small portion (1/5) have employer provided health insurance with 2/3 less likely to be offered employer health insurance. A third of contingent workers are eligible for employer provided insurance compared to ¾ for non contingent. Employer provided health can be extended to immediate family members . Two thirds of contingent workers 2/3 have health insurance from their own arrangement usually from various sources or thru another family member The group 20-54 years usually lack employer health insurance with only 1/3 having employer health insurance and another third from own sources. The teenage have insurance from parents while over65 have universal cover.

The federal EEO Laws prohibits compensation discrimination in the united states. In the article "Earnings and Benefits of Contingent and Non-contingent Workers", pay disparities seem to persist between contingent workers and noncore workers especially between workers in various demographic groups.

The Despite longstanding prohibitions against compensation discrimination under the federal EEO laws, pay disparities persist between workers in various demographic groups. Women who worked full-time had median weekly earnings that were less of the median for men and earnings for African Americans working at full-time jobs were less compared to those of the median for whites. Hispanics earn less whites and African Americans. While some compensation disparities certainly are attributable to differences in occupations, skills, and experience, as well as differences in other legitimate factors, not all disparities can be explained by such factors.

According to 1998, the President's Council of Economic Advisers , 1988 in a report on the gender wage gap in which it stated that one rough but plausible measure of the extent of pay discrimination is the unexplained difference in pay. The Council determined that after accounting for measurable factors, there still is an unexplained 12% gap between the pay of men and women. In its year 2000 report, the Council also estimated an unexplained 12% pay gap between men and women in the field of information technology. In terms of race, a private study has estimated that only about half of the wage gap between African-American and white women is explainable by differences in occupation, education, and other legitimate factors

It is important to note that the federal law prohibit compensation discrimination based on race, color, sex, religion, national origin, age, disability, or protected activity. A claim of compensation discrimination can be brought under one of these statutes even if no person outside the protected class holds a "substantially equal," higher paying job. In addition it prohibit discriminatory practices that indirectly affect compensation such as limiting groups protected by these statutes to lower paying jobs. The law requires employers to pay male and female employees at the same establishment equal wages "for equal work on jobs the performance of which requires equal skill, effort, and responsibility, and which are performed under similar working conditions. The jobs that are compared need be only substantially equal, not identical. Unequal compensation can be justified only if the employer shows that the pay differential is attributable to a bona fide seniority, merit, or incentive system, or any other factor other than sex.

Specifically, how has the employment of contingent employees affected an organization’s business, its HRM responsibilities, its overall costs, as well as its organizational culture?   

The employment of contingent employees has had a great effect on organizations business. The main reason why employers use contingent employees such as independent contractors and temporary employees is to save on costs. Permanent employees are paid for all the hours they have spent in the employers premises while contingent is paid only for the productive time. Contingent workers are not provided with vacation time, sick leave and health insurance compared to the permanent employee and this translates to cost savings for the organization. While using independent contractors a firm is able to avoid withholding payroll taxes, social security, Medicare taxes and unemployment contributions resulting in great cost savings.

By using contingent workers a firm can increase efficiency for peak hours, days, in periods of demand and on projects .During off peak the labour may not be necessary.Firms can ease administrative burdens by removing the need for routine employment documentation and other administrative tasks.

Contingent workers provide a stop gap measure for a firm which allows a stable employment for the core employees. This provides better job security to core employees. Increasing and reducing contingent workers when there is need allows for stability to the existing core workers. The organisation can tap in to the proven and experienced contingent employees when there is need to recruit since there is an opportunity to evaluate their performance.

Since most of the contingent workers have worked in various organizations, they provide a broad talent pool from which selection can be done in times of special projects such as a multi skilled independent contractor. They further provide a lot of flexibility for the in adjusting and maintaining staffing levels allowing increase and decrease of staff with minimal legal risks and economic consequences.

When employers get so used to using contingent workers they may forget the potential legal and practical risks that can arise. Contingent workers are not dependent on any particular employer for their livelihood or motivated by normal advancement opportunities and they may end up being less loyal, less productive and likely to produce lower quality work than regular employees. Others may feel like they are treated like second class citizens or as part of the team leading them to believe their contributions aren’t recognized or rewarded like for the core employees. Some core employees may resent contingent workers where they feel that they deny them opportunities to earn overtime or taking a full time job from someone more deserving. In other cases a former core employee discharged during down time may not take back his post since contingent workers are doing the work leading to the resentment. There is lack of confidentiality in that there is no guarantee that he wont move to competitors in a matter of time. Where there is a high rate of turnover for the contingent workers, training may be necessary leading to higher training costs.

Organizations must be aware of the danger of legal consequences of misclassification. An employer may be faced with tax liability ,wage and hour violations, discrimination charges ,liability for job related injuries and workers compensation, employee benefits liability, occupational safety and health The decision on use of contingent must be well considered since the employer has to enjoy the benefits as well as manage the consequences when they arise.

In your educated opinion, should the compensation of contingent workers be the same as regular, full-time employees doing the same work?  Discuss.

Contingent workers nowadays are well educated, highly skilled and aware how much they bring on the table. They value freedom and profession. They value their contributions and majority perform to their best. They expect to be treated well and almost equally as core employees. Where they are doing the same work, it is important that they be get a pay that is almost equal to what is paid to core workers. However it is their output that should be remunerated and as such, it is important for an organization to design a contract for measuring the output than can be signed by the workers. Depending on the time they are with the company, they should be made to feel they are part of the team and where possible be provided with employer benefits such as health insurance for those working for longer periods. They should be treated well always. However care should be taken to avoid keeping them too well as this can demoralise the core employees.

How would you, as the CEO of the company, create a sense engagement with the infusion of regular employees and contingent workers?

According to the Kelly Services report 2011, "The New Workforce: Insights into the Free Agent Workstyle," contingent workers are well-educated, highly skilled and aware of how much they bring to the table. They deliberately choose free agent status not because they can't find traditional employment, but because they value the freedom and professional possibilities that come with that choice.

In the past contingent employee was seen as inferior compared to core employees. This is however changing and nowadays majority are well educated, highly skilled and aware how much they bring on the table. They value freedom and professional possibilities that come with that choice. They consider their contribution at workplace valuable and expect to be treated on an equal professional level. They want to perform at the highest level, and need as much feedback to keep performing at that level and expect reasonable pay compared to that of regular employee. They need to be coached and require professional support in work place. Management should recognise the value free agent bring to tor organization but remember important distinction that remain especially during long term assignments. Contingent workers generally are not eligible for the same benefits. Usually work in a co-employment capacity, meaning that their actual employer is most likely a third party. These distinctions should help define the goal from the manager's perspective when it comes to hiring and managing contingent workers. The successful engagement of a contingent worker focuses on the work site and the job at hand-. Properly classify free agents and clarify the work process up front and make sure that benefits plans specifically state who is eligible and who is not. While some companies have mastered these lines between regular and contingent workers, it's still a challenge for other organizations that are just starting to diversify their workforce. This is where the staffing agency that provides these workers can add value beyond the hiring process. Too often companies don't understand that they are paying the workforce solutions to provide a quality candidate, but also to ensure that the contingent worker's assignment is successful from beginning to end. So take advantage of the provider's ability to foster clarity about the entire process-from interviewing and screening to providing the professional coaching a contingent worker might need to perform at the highest level the position requires.

With more and more highly skilled workers choosing employment on their own terms, an organization's willingness to evaluate its workforce and embrace the free-agent work style will continue to be a wise decision as the economy recovers. If you can successfully integrate free agents into your workplace and make efficient use of their talent, you'll gain the competitive edge that comes from a diverse talent base.

PART 1

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Hipple, S., & Stewart, J. (1996). Earnings and benefits of contingent and non contingent workers.Monthly Labor Review, 119(10), 22-30. Retrieved June 2, 2013, from the TUI Library.

Jon B. Christianson and Sally Trude, 2003: Managing Costs, Managing Benefits: Employer Decisions in Local Health Care Markets

Sheehan, C., & Cooper, B. K. (2011). HRM outsourcing: The impact of organisational size and HRM strategic involvement. Personnel Review, 40(6), 742-760. Retrieved June 2, 2013, from the TUI Library. 

Restat, The Value of Alternative Pharmacy Networks and Pass-Through Pricing. restat.com or www.milliman.com

http://www.metlife.com/assets/institutional/services/insights-and-tools/ebts/Employee-Benefits-Trends-Study

PART 2

Beard, K. M., & Edwards, J. R. (1995). Employees at risk: Contingent work and the psychological experience of contingent workers. Journal of Organizational Behaviour (1986-1998),109-109.

De Gilder, Dick. "Commitment, Trust, and Work Behaviour: The Case of Contingent Workers." Personnel Review 32, no. 5 (2003): 588–605.

Francis, Walton. Putting Medicare Consumers in Charge: Lessons from the FEHBP. 2009. Washington, D.C.: American Enterprise Institute.

Gruber, Jonathan. March 2009. Choosing a Medicare Part D Plan: Are Medicare Beneficiaries Choosing Low-Cost Plans? Henry J. Kaiser Family Foundation. Retrieved 2010-01-28.

Hipple, S., & Stewart, J. (1996). Earnings and benefits of contingent and noncontingent workers. Monthly Labor Review, 119(10), 22-30. Retrieved June 2, 2013, from the TUI Library.

Hom, P. W. (1979, 22). Effects of job peripherality and personal characteristics on the job satisfaction of part-time workers. Academy of Management Journal, 551-565. Lawrence, T. (2012). Integrating contingent workers. Baseline, (114), 13-13. Retrieved June 2, 2013, from the TUI Library.

U.S. Office of Personnel Management Web Site for Federal Employee Health Plans. http://www.opm.gov/insure/health. Retrieved 2010-01-28.

McKie, W. Gilmore, and Laurence Lipsett. The Contingent Worker: A Human Resources Perspective. Alexandria, VA: Society for Human Resource Management, 1995.

Rice, Elizabeth M. "Capitalizing on the Contingent Workforce—Outsourcing Benefits Programs for Non-Core Workers Improves Companies' Bottom Line." Employee Benefit Plan Review 58, no. 8 (2004): 16–18.

U.S. Bureau of Labor Statistics.(2001) "Contingent and Alternative Employment Arrangements, February 2001."