chapter 13 providing employee benefits

13-1McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All Rights Reserved.

fundamentals of

Human Resource Management 4th editionby R.A. Noe, J.R. Hollenbeck, B. Gerhart, and P.M. Wright

CHAPTER 13

Providing Employee Benefits

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What Do I Need to Know?

1. Discuss the importance of benefits as a part of employee compensation.

2. Summarize the types of employee benefits required by law.

3. Describe the most common forms of paid leave.

4. Identify the kinds of insurance benefits offered by employers.

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What Do I Need to Know? (continued)

5. Define the types of retirement plans offered by employers.

6. Describe how organizations use other benefits to match employees’ wants and needs.

7. Explain how to choose the contents of an employee benefits package.

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What Do I Need to Know? (continued)

8. Summarize the regulations affecting how employers design and administer benefits programs.

9. Discuss the importance of effectively communicating the nature and value of benefits to employees.

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Figure 13.1: Benefits as a Percentage of Total Compensation

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The Role of Employee Benefits

• Benefits contribute to attracting, retaining, and motivating employees.

• The variety of possible benefits helps employers tailor their compensation to the kinds of employees they need.

• Employees have come to expect that benefits will help them maintain economic security.

• Benefits impose significant costs.

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The Role of Employee Benefits (continued)

• Benefits packages are more complex than pay structures, making them harder for employees to understand and appreciate.

• The important role of benefits is one reason that benefits are subject to government regulation.– Legally required benefits.– Tax laws can make benefits favorable.

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Table 13.1: Benefits Required by Law

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Benefits Required by Law:Social Security

• The federal Old Age, Survivors, Disability, and Health Insurance (OASDHI) program which combines:– Old age (retirement) insurance– Survivor’s insurance– Disability insurance– Hospital insurance (Medicare Part A)– Supplementary medical insurance

(Medicare Part B)

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Benefits Required by Law:Social Security (continued)

• Employers and employees share the cost of Social Security through a payroll tax. The percentage is set by law.

• In 2009, employers and employees each paid a tax of 7.65% on the first $106,800 of the employee’s earnings– 6.2% of earnings goes to OASDHI– 1.45% of earnings goes to Medicare (Part A)– For earnings above $106,800 only the 1.45% for

Medicare is assessed

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Benefits Required by Law:Unemployment Insurance

• A federally mandated program administered by the states.

• Focuses on minimizing the hardships of unemployment:– Payments to unemployed workers.– Help in finding new jobs.– Incentives to stabilize employment.

• Most funding comes from federal and state taxes on employers.

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Benefits Required by Law:Unemployment Insurance (continued)

• The size of the unemployment tax imposed on each employer depends on the employer’s experience rating:– The number of employees a company has laid off

in the past and the cost of providing them with unemployment benefits.

• Careful human resource planning can minimize layoffs and keep their experience rating favorable.

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Benefits Required by Law:Unemployment Insurance (continued)

To receive benefits, workers must meet four conditions:

1.They meet requirements demonstrating they had been employed.

2.They are available for work.3.They are actively seeking work.4.They were not discharged for cause, did not

quit voluntarily, and are not out of work because of a labor dispute.

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Benefits Required by Law:Workers’ Compensation

• State programs that provide benefits to workers who suffer work-related injuries or illnesses, or to their survivors.

• They operate under a principle of no-fault liability:– An employee does not need to show that the

employer was grossly negligent in order to receive compensation.

– The employer is protected from lawsuits.

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Benefits Required by Law:Workers’ Compensation (continued)

• Major categories of benefits:– Disability income– Medical care– Death benefits– Rehabilitative benefits

• The amount of benefits income varies from state to state. It is generally two-thirds of the worker’s earnings before the disability.

• The benefits are tax free.

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Benefits Required by Law:Workers’ Compensation (continued)

• The cost of the workers’ compensation insurance depend on the:– Kinds of occupations involved– State where the company is located– Employer’s experience rating

• Unfavorable experience ratings lead to higher insurance premiums.

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Benefits Required by Law:Unpaid Family and Medical Leave• Family and Medical Leave Act (FMLA) of 1993– Requires organizations with 50 or more employees

to provide up to 12 weeks of unpaid leave:• After childbirth or adoption• To care for a seriously ill family member• For an employee’s own serious illness

– Employers must also guarantee these employees the same or comparable job when they return to work.

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Benefits Required by Law:Unpaid Family and Medical Leave (continued)

• When employees experience pregnancy and childbirth, employers must also comply with the Pregnancy Discrimination Act.

• If an employee is temporarily unable to perform her job due to pregnancy, the employer must treat her in the same way as any other disabled employee.– e.g., modified tasks, alternative assignments,

disability leave, or leave without pay

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Test Your Knowledge

• XYZ company has determined that they will have to reduce their benefits costs to stay competitive. Which of the following solutions is not a choice for XYZ?a) Eliminate health coverageb) Reduce the percentage of employees’ Social Security

insurance they pay.c) Reduce their unemployment insurance costs by

managing their workforce to avoid layoffs.d) Institute a safety program to minimize worker’s

compensation costs.

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Optional Benefits Programs

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Figure 13.2: Percentage of Full-Time Workers with Access to Selected Benefit Programs

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Optional Benefits Programs:Paid Time Off• Vacation• Holidays• Sick Leave• Personal Days• Floating Holidays• Jury Duty• Funerals• Military Duty• Time Off to Vote

• Paid Time Off (PTO) Bank– Most flexible approach– Employer pools pools

personal days, sick days, and vacation days for employees to use as the need arises

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Paid time off is a way for employees to enjoy time with their families and to refresh their bodies and spirits.

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U.S. and Japanese Workers Take Short Vacations

• On average, workers in the United States take 11 of their 13 vacation days.

• Japanese workers , on average, receive 15 vacation days but only take 7.

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Optional Benefits Programs:Group Insurance

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Medical Insurance

• 70% of all full-time employees in the U.S. receive medical benefits

• Policies typically cover:– Hospital expenses– Surgical expenses– Visits to physicians

• Additional coverage may include:– Dental care– Vision care– Birthing centers– Prescription drug

programs

• Mental Health Parity Act (1996)

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Medical Insurance (continued)

• Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985– Federal law that requires employers to permit

employees or their dependents to extend their health insurance coverage at group rates for up to 36 months following a qualifying event:• Layoff• Reduction in hours• Employee’s death

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Medical Insurance (continued)

Employer approaches to controlling health care benefits costs:

1.Managed Care2.Health Maintenance Organizations (HMO)3.Preferred Provider Organizations (PPO)4.Flexible Spending Accounts5.Consumer-Driven Health Plans (CDHP)6.Employee Wellness Programs (EWP)

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Figure 13.3:Health Care Costs in Various Countries

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Life Insurance

• Employers may provide life insurance to employees or offer the opportunity to buy coverage at low group rates.

• Term life insurance – if the employee dies during the term of the policy, the employee’s beneficiaries receive a death benefit payment.– Usually twice the employee’s yearly pay.

• Additional benefits may include accidental death and dismemberment.

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Disability Insurance

Short-Term Disability Insurance

• Insurance that pays a percentage of a disabled employee’s salary as benefits to the employee for six months or less.

Long-Term Disability Insurance

• Insurance that pays a percentage of a disabled employee’s salary after an initial period and potentially for the rest of the employee’s life.

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Optional Benefits Programs:Retirement Plans

• About half of employees working in the private business sector have employer-sponsored retirement plans.

• Contributory plan - retirement plan funded by contributions from the employer and employee.

• Noncontributory plan - retirement plan funded entirely by contributions from the employer.

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Figure 13.4: Sources of Income for Persons 65 and Older

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Optional Benefits Programs:Retirement Plans (continued)

• Defined benefit plan – pension plan that guarantees a specified level of retirement income.

• The employer sets up a pension fund to invest the contributions.

• Such plans must meet the funding requirements of the Employee Retirement Income Security Act (ERISA) of 1974.– The employer must contribute enough for the plan to

cover all the benefits to be paid out to retirees.

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• Employee Retirement Income Security Act (ERISA): federal law that increased the responsibility of pension plan trustees to protect retirees, established certain rights related to vesting and portability, and created the Pension Benefit Guarantee Corporation.

• Pension Benefit Guarantee Corporation (PBGC): federal agency that insures retirement benefits and guarantees retirees a basic benefit if the employer experiences financial difficulties.

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• Defined contribution plan – retirement plan in which the employer sets up an individual account for each employee and specifies the size of the investment into that account.– Money purchase plans– Profit-sharing and employee stock ownership plans– Section 401(k) plans

• These plans free employers from the risks that investments will not perform as well as expected.

• The responsibility for wise investing is with each employee.

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Figure 13.5: Value of Retirement Savings Invested at Different Ages

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Test Your Knowledge

• Jakar does not know a lot about investing and wants to ensure he has some retirement income when he is old enough to retire. Agnes plans on changing employers every few years and is interested in investing her own money. Which plan would be best for Jakar and Agnes, respectively?a) Defined contribution; defined benefitb) Contributory; defined benefitc) Defined benefit; defined contribution d) Defined contribution; non-contributory

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• Cash balance plan – retirement plan in which the employer sets up an individual account for each employee and contributes a percentage of the employee’s salary.– The account earns interest at a predefined rate.– This arrangement helps employers plan their contributions

and helps employees predict their retirement benefits.– If employees change jobs, they generally can roll over the

balance into an individual retirement account (IRA).

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Vesting Rights• Guarantee that when

employees become participants in a pension plan and work a specified number of years, they will receive a pension at retirement age, regardless of whether they remained with the employer.

Summary Plan Description• Report that describes a

pension plan’s funding, eligibility requirements, risks, and other details.

• Employers also provide an individual benefit statement which describes the employee’s vested and unvested benefits.

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Optional Benefits Programs:“Family-Friendly” Benefits

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Figure 13.6: Percentage of Employees with Various Levels of Child Care Benefits

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Optional Benefits Programs:Other Quality of Work-Life Benefits• Subsidized cafeterias• On-site health care

services• Moving and relocation

expenses• Employee discounts on

products• Employee buying

service

• Tuition reimbursement• On-site fitness center• On-site dry cleaning

services• Dues for professional

organizations• Off-site company

recreation area• Pet services

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Selecting Employee Benefits

• Decisions about which benefits to offer should take into account:– The organization’s goals and objectives– The organization’s budget– The expectations of the organization’s current

employees and those it wishes to recruit in the future.

• An organization that does not offer expected benefits will have difficulty attracting and keeping employees.

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Table 13.2:An Organization’s Benefits Objectives

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Employees’ Expectations and Values

• Employees expect to receive benefits that are legally required and widely available.

• They value benefits they are likely to use.

• The value employees place on various benefits is likely to differ from one employee to another.

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Employee Expectations and Values (continued)

• Organizations can address differences in employees’ needs and empower their employees by offering flexible benefits plans in place of a single benefits package for all employees.

• Cafeteria-style plan: a benefits plan that offers employees a set of alternatives from which they can choose the types and amounts of benefits they want.

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Suggested Ways Employers Can Control the Cost of Health Benefits

1. Shop for bargains. Every year, the company should research available plans and compare quotes from different providers.

2. Know what employees care about. Would they be willing to accept a higher deductible if it means the company can also afford prescription drug coverage?

3. If employees are willing to take responsibility for their own health care spending, offer a health- savings account or consumer-driven plan.

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Suggested Ways Employers Can Control the Cost of Health Benefits (continued)

4. Review your claims history. You might be able to identify correctable problems.

5. Encourage healthy behavior with incentives like discounts for health club memberships, free health screenings, and lower premiums for employees who participate in a wellness program.

6. Promote a workplace culture that values healthy habits.

7. Measure the results of any initiative you try.

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Legal Requirements for Employee Benefits

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Communicating Benefits to Employees

• Organizations must communicate benefits information to employees so that they will appreciate the value of their benefits.

• This is essential so that benefits can achieve their objective of attracting, motivating, and retaining employees.

• Employees are interested in their benefits, and they need a great deal of detailed information to take advantage of benefits.

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Summary

• Like pay, benefits help employers attract, retain, and motivate employees. The variety of possible benefits also helps employers tailor their compensation packages to attract the right kinds of employees.

• Employees expect at least a minimum level of benefits, and providing more than the minimum helps an organization compete in the labor market.

• Benefits are also a significant expense, but employers provide benefits because employees value them and many benefits are required by law.

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Summary (continued)

• Employers must contribute to the Old Age, Survivors, Disability, and Health Insurance program known as Social Security through a payroll tax shared by employers and employees.

• Employers must also pay federal and state taxes for unemployment insurance.

• State laws require that employers purchase workers’ compensation insurance.

• The major categories of paid leave are vacations, holidays, and sick leave.

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Summary (continued)

• Medical insurance is one of the most valued employee benefits.

• To manage the costs of health insurance, many organizations offer coverage through a health maintenance organization or preferred provider organization, or they may offer flexible spending accounts.

• Retirement plans may be contributory or noncontributory. These plans may be defined benefit plans or defined contribution plans.

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Summary (continued)

• Employers have responded to work-family role conflicts by offering family-friendly benefits.

• In deciding the contents of a benefits package, organizations need to establish objectives and select benefits that support those objectives.

• Organizations should also consider employees’ expectations and values.

• Employers must comply with the numerous laws and regulations affecting how they design and administer benefits programs.

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Summary (continued)

• Communicating information about benefits is important so that employees will appreciate the value of their benefits.

• Communicating their value is the main way benefits attract, motivate, and retain employees.

chapter 13 providing employee benefits

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