HRM Module 1 PDF

# Chapter 8: Employee Benefits and Services ## Chapter Outline: 1. Origin 2. Tax Advantages of Benefits 3. Justification in Giving Benefits 4. Objectives of Benefits 5. Communicating the Costs of Benefits 6. Classification of Employee Benefits and Services 7. Managing an Effective Benefits Program...

# Chapter 8: Employee Benefits and Services ## Chapter Outline: 1. Origin 2. Tax Advantages of Benefits 3. Justification in Giving Benefits 4. Objectives of Benefits 5. Communicating the Costs of Benefits 6. Classification of Employee Benefits and Services 7. Managing an Effective Benefits Program ## Indirect Financial Compensation Indirect financial compensation is called **benefits and services**. It represents an important part of just about every employee's pay. benefits are generally available to all the firms and include such things as time off with pay, health and life insurance, retirement, etc. Employees should take note of the fact that these benefits are not free, even if workers are not charged for them. Employee benefits are a substantial cost to employers. Most employees do not realize the market value and high cost to the employer of their benefits, so prudent employers only give benefits that are mandated by law. Benefits are intended to help protect employees' physical well being and provide for retirement and not intended to be tied to an individual's performance. ### Origin Before 1970, benefits were usually called "fringe benefits" suggesting that these non-wage benefits represented a small addition to the regular pay to make the compensation package more attractive. In recent years, the word "fringe" has been dropped because benefits no longer represent a small addition to compensation. As a percentage of the total payroll costs, benefits have increased significantly. To add, the concept of giving employee benefits voluntarily has changed in recent years when the government through legislation required private firms to give certain benefits to their employees. These benefits have even expanded in scope, by means of including the members of the employees' families. Today, employee benefits fall under two categories: * Those granted by management at its own initiative or through collective bargaining negotiations, and * Those required by government legislation ## Tax Advantages of Benefits One of the major driving forces behind the growth of employee benefits was their tax advantage benefits were not taxed. BIR ruled that employers could deduct the costs of benefits as a business expense and the employees do not need to include the value of health benefits in their taxable income. Hence, employer provided benefits that are much less costly than the benefits workers could purchase on their own with after tax. Today, benefits constitute a major portion of labor costs. ## Non-Taxable Benefits Under the Code * Compensation for sickness of injury * 13th Month pay and other bonuses not to exceed P30,000 a year * Allowances and benefits given for the convenience of the employer * Allowances and benefits given which are in the nature of or necessary to the taxpayer's business, trade, or profession * SSS, PhilHealth, and Pag-ibig contributions, as well as union dues * Contributions of the employer for the benefit of the employee for the employee's retirement, hospitalization, and health insurance De Minimis (RR 10-2000) ### Additional Benefits not Subject to Tax: * Monetized unused vacation leave credits of employees not exceeding 10 days * Medical cash allowances to employee dependents not exceeding P750 per semester or P125 per month * Rice subsidy of 1,000 or one sack (50kg) of rice per month whose value does not exceed P 1,000 * Uniform and clothing allowances not exceeding P3,000 per annum * Laundry allowance not exceeding P300 per month * Employee achievement awards which must be in the form of tangible personal property other than cash or gift certificates with an annual monetary value of P 10,000 under an established written plan * Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per annum * Daily meal allowance for overtime work not exceeding 25% of the basic minimum wage ## Justification in Giving Benefits ### For Employees' Welfare For many years, employers provided benefits chiefly for humanitarian reasons. Experience demonstrated that most employees would not provide their own medical and accident insurance if the costs of these benefits were added in their paychecks. Consequently, employers provided benefits because they believed the welfare of their employees would be enhanced by the benefits. Employers found that any assistance given to the employee to meet his contingent personal needs and problems such as sickness, accident or death in the family, could increase his efficiency. To add, with the protection accorded by the government to existing labor union, employees are now able to demand, through collective bargaining, various kinds of benefits in addition to their basic pay. Benefits not mandated by law are now being demanded by labor unions as workers' rights. ### Some Employers Provide Benefits to Keep the Organization Competitive in Recruiting and Retaining Employees with the Belief that This Will Increase Employee Performance ## Objectives of Benefits: * Competitiveness including cost effectiveness * Compliance with legal regulations * Choices tailored to the individual employees needs and wants ### Benefit Programs are Based Primarily on Three Philosophies: * Sharing the risks of accident and illness. It provides a dignified way for employees to receive a relatively secure and constant level of income regardless of illness, accident, or time away from work. * Forced savings for retirement or bad times. This is viewed as a reasonable inducement to save for the future. * Sharing the costs of special services ## Computing the Costs of Benefits Since employee benefits represent a major cost item for most companies, efforts to analyze and control benefit costs have become increasingly important. Given the enormous cost to an organization of benefit packages, managers must carefully assess the benefit that accrues to the organization from those packages. On the one hand, the organization is required to provide appropriate benefits to employees. On the other hand, the best interest of stockholders and other constituents of the organization require the firm to manage its resources wisely. Thus, it is important to periodically assess the extent to which costs are in line. ### Four Methods to Analyze Benefit Costs (Roger Thompson. Benefits Costs Surge Again. Nations Business St. Feb. 1993): * **Annual Cost Method** – simply reports the total annual cost for each benefit. * **Cost per employee per year** – computed by dividing the total cost of each benefit by the number of employees receiving the benefit. The result, showing the total cost per employee, is especially meaningful when communicating with employees because most employees do not appreciate how much employers spend on benefits for each employee. * **Percent of Payroll** – shows the costs of benefits relative to the amount spent for wages and salaries. The result is especially useful in making comparisons between the benefits costs of different companies. It is calculated by dividing the total annual cost of benefits by the total payroll cost. * **Cost per hour figure** - shows the costs of benefits per employee per hour. The result is frequently used in expressing the costs of benefits especially during contract negotiations between unions and employers. ## Communicating the Costs of Benefits For some or most employees, they do not appreciate or value their benefits, largely because they are unaware of them. Failure to understand benefits components and their value is a root cause of employee dissatisfaction with benefits (George Dreher et.al. Benefit Coverage and Employee Cost: Critical Factors in Explaining Compensation Satisfaction. Personnel Psychology, 1988). Communication is not a one way process. Employees need to be involved in choosing benefits; if some choice is available, the chances are that: * Employees will understand their benefits. * They will be more satisfied with their benefits. Evidence suggests that awareness about benefits can be increased through communication via several media and that, as awareness increases, so does satisfaction with benefits (H.W. Hennessey et.al, Impact of Benefit Awareness on Employee And Organizational Outcomes: A Longitudinal Field Experiment. Benefits Quarterly, 1992). ## Classification of Employee Benefits and Services ### Mandated Benefits Program/Legally Required Benefit These are benefits designed to protect employees when their income is threatened or reduced by illness, disability, unemployment or retirement. * **Social security through SSS for employees in private companies and GSIS for government employees.** The Social Security System of the Philippines created by RA No. 1161 as amended, was established on September 1, 1957. Its purpose is to render assistance to employees and their families in case the source of their income is terminated, reduced, or interrupted because of sickness, disability, death, or old age. The SSS grants retirement benefits, maternity, disability, sickness, funeral, housing production, and salary loans to all members. Aside from this, the employee as well as his immediate family are also protected against the hazards of hospitalization under the Medical Care Law. * **Employees’ Compensation** - Employees who incur expenses as a result of work connected injury, sickness, disability, or death receives financial protection, medical or related benefits, and rehabilitation services through the employment tax exempt program created by the government. Employer pays the entire cost of this employee's compensation insurance and this is compulsory to all employers regardless of capitalization and the type or nature of the business. * **Thirteenth Month Pay** – another legally required benefit which was designed to give additional compensation to employees during the holiday season. * **Paid vacation and paid holidays** – The Labor Code now requires private firms to grant paid vacation leave of at least 7 working days each year and this is called service incentive leave. Aside from this, most full-time or regular employees receive around 10 paid holidays per year. These include: New Year's Day, January 1; Maundy Thursday and Good Friday, movable dates; Araw ng Kagitingan, April 9; Labor Day, May 1; Independence Day, June 12; National Heroes' Day, Last Sunday of August; Bonifacio Day, Nov. 30; Christmas Day, Dec. 25; Rizal Day, December 30. * **Retirement benefit** – In addition to the retirement benefits under SSS and GSIS, the law provides that a retiring employee, upon reaching the early retirement age of 60 or the late retirement age of 65, or upon completion of 30 years of service whichever is preferred by both the employer and the employee, shall be entitled to all the retirement benefits provided therein or to termination pay equivalent to at least half-month salary for every year of service, a fraction of at least six months being considered as one whole year. * **PAG-IBIG Fund Benefit** - PAG-IBIG is a housing and provident fund where member employees may avail of a multi-purpose or housing loan. It is likewise a savings program where the employees' contribution is matched by an equal contribution from employer earning dividends and collectible upon maturity, retirement at age 65, or in case of total disability, insanity, or permanent departure from the country. * **Sickness/PhilHealth Program** - Being an SSS or GSIS member, an employee is automatically covered by PhilHealth, the premiums of which are shared by the employer and the employee. * The program has the following provisions: * An employee and his legal dependents can avail of the PhilHealth hospitalization, surgical and medical benefits. * It provides 45 days of hospital confinement in a year provided three monthly contributions have been paid within the immediate 12 months prior to first day of confinement. * It shoulders a portion of the hospital expenses. * **Paternity Leave** – The newest legally mandated benefit in the Philippines is the Paternity leave which became effective last July 5, 1996. It provides seven days leave with full pay to all married male employees in the private and public sectors for the first four deliveries of the legitimate spouse with whom he is cohabiting. * **Retirement income** – Employees retirement income comes from four sources: * **Asset income** - generated by personal savings and investment. There are a wide variety of employer-assisted savings or capital accumulations plans. The strategy is to shift income to post retirement years. * **Private pensions** – Many employers provide pension funds to retired employees with the amount usually based on years of service and income level while employed. Employers may choose from two types of pension plan – the defined benefit plans or defined contribution plans. If a defined benefit plan is chosen, an employer is committing itself to an unknown cost that can be affected by rates of return on investments, changes in regulations, and future pay levels. Consequently more employers have adopted defined contribution plans since it specify the rate of employer and employee contributions (Stanton M. Beyond your Paycheck: An Employee Benefits Primer. Occupational Outlook Quarterly. Fall 1990.). * **Social security benefits** * **Earnings** ### Voluntary Benefits or Received through Collective Bargaining Negotiations * **Compensation for Time Off or Time Not Worked** * Common time off with pay periods include holidays, vacations, funeral leave, sick leave, maternity leave, paternity leave, emergency leave, sabbatical leave, break time/coffee breaks, paid lunch break, and rest periods. * **Group Life Insurance** – provides lower rates for both the employer and employee than if they bought such insurance as individuals. It usually contains a provision for including all employees regardless of health or physical condition. Insurance coverage is not mandated but has become such a standard benefit that most organizations elect to provide them. * **Hospital, Medical, and Disability Insurance** – Many employees provide health insurance plans that cover at a minimum, basic hospitalization, surgical and medical insurance for all eligible employees as a group. Some even offer membership in a health maintenance organization like PHILAMCARE, AYALA Health Care, Excel, and others. This is a pre-paid health care system that generally provides routine round-the-clock medical services as well as preventive medicine whether in-patient or out-patient. * **Pension Plans** – refers to the periodic payment to workers who are retired from the company because of old age, illness, or for other reasons as determined by the employer, and as provided for in the plan. * Pension plans are either contributory or non-contributory. Contributory plans require workers to put in part of their earnings while employed, and at the same time the company contributes to a fund which accumulates and defrays the cost of the pension. ### Employee Services While an employers' time off and insurance and retirement benefits account for the main part of its benefit costs, most employers also provide a range of services including personal services, executive perquisites, and the like. * **Personal Services Benefits** * **Credit Unions** - Credit unions are usually separate businesses established with the assistance of the employer. This provides loans at a lower rate of interest plus other benefits for all eligible members. * **Counseling services** – These include family counseling for marital problems and the like, career counseling in terms of analyzing one's aptitudes and interest, legal counseling. * **Other personal services** such as social and recreational opportunities including company-sponsored athletic clubs, Christmas party, annual summer picnics. * **Job related services benefits** * Free uniform * Subsidized or free employee transportation * Food services/cafeteria – Food services are provided by many employers, usually at relatively low prices. * Educational subsidies/grant – This is in the form of scholarship or tuition refund depending on the agreement of the employer and the employee. * Stock ownership plans - Encourage employee to purchase company stock at a lower price to increase employee's incentive to work. This is based on the belief that if employees become partners in the business, they work harder. * **Executive Perquisites** Perquisites or perks for short are usually given to only a few top executives. These may include free use of company cars or chauffeured limousines, reserved parking, security systems, company yachts and planes, executive dining rooms, club membership, credit cards, expense account for household expenses and entertainment, travel expenses, a condo unit, golden parachute (general severance pay if job is lost because of merger or takeover), and so on depending on the company. This is the company's way of making their hard-working executives' live pleasant life as possible and to be able to retain the best executives. These are also extra benefits that may or may not have any direct financial value but is considered to be an important reward to members of top management or to certain valuable professionals within the organization. ## Managing an Effective Benefits Program (Barton Beam and John Mc Fadden. Employee Benefits. Dearbon Financial Publishing. 1992) * **Set objectives and strategy for benefits.** * **Pacesetter strategy** – be first with the newest benefits employees desire. * **Comparable benefits strategy** – matches the benefits program similar organizations offer. * **Minimum benefits strategy** – offers the mandatory benefits and those that are most desired and least costly to offer. * **Involve employees and unions rather than just the top managers alone in judging which benefits the employees prefer. It is wise to permit or encourage employee participation in decision-making on benefits and services. It is also useful to involve the union leadership in preference studies so that all parties involved are seeking benefits desired by the employees.** * **Communicate benefits** - How can benefits and services affect the satisfaction and performance of employees if they do not know about the benefits or understand them? Communication media such as employee handbooks, company newsletter, bulletin boards, and employee reports can be used. * **Monitor costs clearly** – It is vital that managers make sure the programs are administered correctly. More efficient administration procedures using computerized methods can also lead to greater savings and more satisfied employees. ## Questions for Discussion and Review 1. Differentiate indirect financial compensation from wages and salaries. 2. Why do employers offer benefits and services? 3. Describe government-mandated benefits. What are the advantages and disadvantages of each? 4. What is meant when it is said that many employees view employee benefits and services as entitlements? How can employers make employees realize that benefits and services must be earned? 5. You are applying for a job as a manager. At the point of negotiating salary and benefits, what questions would you ask your prospective employer concerning benefits? Describe the benefits package you would try to negotiate for yourself. 6. You are the human resource consultant to a small business with about 50 employees. At the present time, they offer only legally mandated benefits such as service incentive leave and 13th month pay. Develop a list of other benefits you believe they should offer, along with your reasons for suggesting them. 7. Explain the relationship among rewards, motivation, and performance. 8. Putting yourself in the role of an employee either in your present job or the next job you anticipate having, identify the benefits that are most important to you and how you think you can most likely attain them. ## Short Cases for Discussion ### A. The Employee's Pregnancy Mrs. Dang Dumael is the supervisor of a department in a small manufacturing company of precision tools. Four operators who are mostly men, except Ching who is five months pregnant, competently operate the machinery at the production department. She had been there when Mrs. Dumael was hired and has maintained an excellent work record. The job requires very little physical exertion and most of the time employees simply have to push buttons. Occasionally, however, it is necessary to lift boxes associated with the work. Ching's fellow workers had been doing this for her during most of her pregnancy, but one day all were extremely busy and no one had time to help her. Thus, a bottleneck was created. Mrs. Dumael reprimanded Ching for not keeping the work flowing steadily. The next day Ching walked into Mrs. Dumael's office and told her that she had read that lifting heavy objects might cause a miscarriage. She requested that she assign other workers to do all of the lifting for her. She also wanted other workers to refrain from smoking for fear it might harm her baby. Mrs. Dumael was caught off-guard by her request and did not know how to respond. She knew the company had no policy which she could follow. Perhaps, she should be sent home on an unpaid leave of absence, or maybe, she could transfer her to a different job where lifting was not required, but this would mean a reduction in Ching's pay by P34-P35 per hour. All of these thoughts raced through her head as she stared up at the ceiling in her office hoping a solution would magically appear. After a few more moments of silence, Mrs. Dumael looked at Ching and said “I had better check with my boss on this one." 1. If you were Mrs. Dumael's supervisor, how would you respond to Ching's request? 2. Should Mrs. Dumael have allowed Ching's co-workers to lift boxes for her? 3. What possible solution should be taken by Mrs. Dumael to solve this problem? ### B. The Incentive Plan The question of whether to pay Manuel's Enterprises employees an hourly wage or an incentive of some kind has always intrigued Lalaine Romasanta. Her basic policy has been to pay employees on hourly wage, except that her managers do receive an end-of-year bonus depending, as Lalaine puts it, "on whether their stores do well or not that year." To add, Lalaine can see several potential problems with the company's policies regarding benefits and services. She also wonders what types of benefits and services should be offered and whether such a benefit would be in the best interests of the company in terms of a more loyal and productive workforce, reduce employee turnover, and perhaps pay lower wages. At the present time, the company has no formal policy regarding vacations or paid days off or sick leave. Informally, it is understood that employees get one week vacation after one year's work, but in the past the policy regarding paid holidays such as New Year's Day and Christmas Day has been very inconsistent. 1. How should Lalaine go about determining the employee benefits and services that would also be beneficial to the company? 2. Draw up a policy statement regarding vacations, sick leave, and paid holidays for Manuel's Enterprises.