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Employee Benefits This page intentionally left blank Employee Benefits A Primer for Human Resource Professionals Sixth Edition Joseph J. Martocchio University of Illinois EMPLOYEE BENEFITS: A PRIMER FOR HUMAN RESOURCE PROFESSIONALS, SIXTH EDITION Published by McGraw-Hill Education, 2 Penn Plaza, New...

Employee Benefits This page intentionally left blank Employee Benefits A Primer for Human Resource Professionals Sixth Edition Joseph J. Martocchio University of Illinois EMPLOYEE BENEFITS: A PRIMER FOR HUMAN RESOURCE PROFESSIONALS, SIXTH EDITION Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2018 by McGraw-Hill Education. All rights reserved. Previous editions © 2014, 2011, and 2008. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning. Some ancillaries, including electronic and print components, may not be available to customers outside the United States. 1 2 3 4 5 6 7 8 9 QVS 21 20 19 18 17 ISBN 978-1-259-71228-9 MHID 1–259–71228–1 Chief Product Officer, SVP Products & Markets: G. Scott Virkler Vice President, General Manager, Products & Markets: Michael Ryan Vice President, Content Design & Delivery: Betsy Whalen Managing Director: Susan Gouijnstook Director, Product Development: Meghan Campbell Product Developer: Laura Hurst Spell Marketing Manager: Necco McKinley Director, Content Design & Delivery: Terri Schiesl Program Manager: Mary Conzachi Content Project Managers: Kelly Hart, Karen Jozefowicz Buyer: Jennifer Pickel Content Licensing Specialist: Shannon Manderscheid Cover Image: Ola Dusegard/Getty Images Cover Design: Studio Montage, St. Louis, MO Compositor: Lumina Datamatics Printer: Quad Graphics Digital All credits appearing on page or at the end of the book are considered to be an extension of the copyright page. Library of Congress Cataloging-in-Publication Data Names: Martocchio, Joseph J., author. Title: Employee benefits : a primer for human resource professionals / Joseph J. Martocchio, University of Illinois. Description: Sixth edition. | New York, NY : McGraw-Hill Education, | Includes bibliographical references and index. Identifiers: LCCN 2016042221 | ISBN 9781259712289 (pbk. : alk. paper) Subjects: LCSH: Employee fringe benefits—United States. | Compensation management—United States. Classification: LCC HD4928.N62 U637 2018 | DDC 658.3/25—dc23 LC record available at https://lccn.loc.gov/2016042221 The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not guarantee the accuracy of the information presented at these sites. mheducation.com/highered For My Students —Joseph J. Martocchio About the Author Joseph J. Martocchio Professor in the School of Labor and Employment Relations, University of Illinois at Urbana-Champaign Professor Martocchio earned his Bachelor of Science degree in management and quantitative methods from Babson College, and both his Master’s and PhD degrees in human resource management from Michigan State University’s School of Labor and Industrial Relations. His research and teaching interests include employee compensation, employee benefits, and employee training and development. Professor Martocchio’s research appears in leading scholarly journals including the Academy of Management Journal, Academy of Management Review, Journal of Applied Psychology, Journal of Management, and Personnel Psychology. He has researched extensively, placing him in the top 5 percent of the most productive researchers published in premier applied-psychology journals in the 1990s, according to a survey conducted by the Society for Industrial and Organizational Psychology (SIOP). Professor Martocchio received the Ernest J. McCormick Award for Distinguished Early Career Contributions from the Society for Industrial and Organizational Psychology (SIOP), and was subsequently elected as a Fellow in both the American Psychological Association and SIOP. Following the attainment of this recognition, he served as the Chair of the HR Division of the Academy of Management as well as in various other leadership roles within that organization. He is the author of the textbook Strategic Compensation: A Human Resource Management Approach (Pearson Higher Education) and coauthor of a textbook with Wayne Mondy, Human Resource Management (Pearson Higher Education). vi Preface Employee benefits refer to compensation other than hourly wage, salary, or incentive payments. Three fundamental roles characterize benefits programs: protection, paid time off, and accommodation and enhancement. Protection ­programs provide family benefits, promote health, and guard against income loss caused by catastrophic factors such as unemployment, disability, and serious illnesses. Paid time-off policies compensate employees when they are not performing their primary work duties, for example, vacation and holidays. Accommodation and enhancement benefits promote opportunities for employees and their families, including stress management classes, flexible work arrangements, and educational assistance. Employee Benefits was written to provide an introduction to the most common employee practices used in U.S. firms. It is an appropriate source of information for those who want to learn the foundation and acquire a breadth of knowledge about these practices. College-level students taking an undergraduate or a graduate course in employee compensation and benefits will build the foundation for understanding the origin of specific benefits practices and fundamental design considerations. Practitioners who work with benefits professionals or are beginning to take on administrative or managerial roles regarding employee-benefits programs will find this book to be an excellent introduction. This book contains 12 chapters, organized into four parts: ▯▯ ▯▯ ▯▯ ▯▯ Part Part Part Part 1: 2: 3: 4: Introduction to Employee Benefits Retirement, Health Care, and Life Insurance Services Extending Employee Benefits: Design and Global Issues Each chapter contains a chapter outline, learning objectives, key terms, discussion questions, and two brief cases. NEW TO THE SIXTH EDITION All the chapters have been thoroughly revised to capture the ever-changing field of employee benefits—and this field changes at a breakneck pace! For instance, the Patient Protection and Affordable Care Act has imposed an employer mandate for offering health-care plans to employees and compliance guidelines. The DoddFrank Act requires even greater transparency of executive benefits practices. Although both laws were passed a few years ago, the implementation requirements have rolled out in phases. In addition, for those who will work with benefits practices in other countries, concepts and data have been added to help make cross-country comparisons. Further, substantially more statistics are included to quantify the costs and prevalence of particular benefits as well as trends where available. All statistics were the most current at the writing of this edition. Finally, thanks to feedback from my students, course instructors, and practitioners, vii viii Preface s­ ubstantial rewriting throughout the book better organizes and breaks down the complexity of benefits practices for the book’s intended readers. SUPPLEMENTAL MATERIALS FOR INSTRUCTORS All supplements are available from the book’s Web site at www.mhhe.com/ martocchio6e. Given the rapid and substantial changes in the benefits area, the Web site also offers updates to text coverage of important benefits topics and issues. Instructor Supplements: Instructor’s Resource Manual, TestBank, and PowerPoint Presentations. ACKNOWLEDGMENTS Many people made valuable contributions. I am also indebted to the reviewers who provided thoughtful remarks for the development of the sixth and previous editions: Among them are James C. Coulson from Chapman University; Larry Morgan from St. Mary’s University; Lori Olson from Western Technical College; Barbara Rau from the University of Wisconsin, Oshkosh; Joel Rudin from Rowan University; and Carol Spector from the University of North Florida. F. Jack Witt III, Vice President of Human Resources and Administration at Owens Community College, provided meticulous comments that draw not only from his extensive field experience, but also from his expertise teaching an employee-benefits course at Wayne State University. At McGraw-Hill Higher Education, my gratitude goes to Michael W. A ­ blassmeir and Laura Hurst Spell for their support and commitment to this project. I thank Kelly Hart for her oversight of this project. At Lumina Datamatics, I thank ­Srinivasan Sundararajan for his fine work during the final stages of this project. Joseph J. Martocchio Brief Contents About the Author Preface vi PART THREE Services vii PART ONE Introduction to Employee Benefits Introducing Employee Benefits 3 Chapter 2 The Psychology and Economics of Employee Benefits 31 Regulating Employee Benefits 61 PART TWO Retirement, Health Care, and Life Insurance 89 Chapter 4 Employer-Sponsored Retirement Plans 91 Chapter 5 Employer-Sponsored Health-Care Plans 127 Chapter 6 Employer-Sponsored Disability Insurance, Life Insurance, and Workers’ Compensation 167 Chapter 7 Chapter 8 Paid Time-Off and Flexible Work Schedule Benefits 219 Chapter 9 Accommodation and Enhancement Benefits 243 1 Chapter 1 Chapter 3 217 PART FOUR Extending Employee Benefits: Design and Global Issues 265 Chapter 10 Managing the EmployeeBenefits System 267 Chapter 11 Nonqualified Deferred Compensation Plans for Executives 289 Chapter 12 Global Employee Benefits at a Glance 311 GLOSSARY INDEX 339 363 Government-Mandated Social Security Programs 191 ix Table of Contents About the Author Preface vi Workforce Changes and the Employment Relationship 33 vii Psychological Contracts PART ONE INTRODUCTION TO EMPLOYEE BENEFITS 1 Chapter 1 Introducing Employee Benefits Employee Attitudes and Employee Benefits 39 Justice and Perceived Organizational Support 39 Organizational Citizenship Behavior 41 3 Defining and Exploring Employee Benefits 4 Defining Employee Benefits 5 The Fundamental Roles and Sources of Employee Benefits 5 Employee Benefits in the Total Compensation Scheme 5 The Field of Employee-Benefits Practice Legally Required Benefits 9 Discretionary Benefits 10 Origins of Employee Benefits 8 Legal and Regulatory Influences on Discretionary Benefits Practices 14 Strategic Planning for a Benefits Program 16 Who Pays for Benefits? Summary 54 46 48 61 The National Labor Relations Act of 1935 18 Chapter 2 The Psychology and Economics of Employee Benefits 31 32 Employment Relationship as Social Exchange How Employee Benefits Constitute Social Exchange 33 63 The Internal Revenue Code 65 The Fair Labor Standards Act of 1938 66 The Employee Retirement Income Security Act of 1974 67 External Environment 21 Internal Environment 25 x Cost Advantage 43 Recruiting Certain Types of Workers Tax Incentives 47 The Need for Government Regulation 62 Labor Unions and Employee Benefits 63 Information Used in Strategic Benefit Planning 20 The Psychology of Employee Benefits The Economics of Employee Benefits: Why Do Employers Offer Benefits? 42 Chapter 3 Regulating Employee Benefits 13 Basic Strategic Planning Concepts 16 Approaches to Strategic Benefits Planning 35 Psychological Contract Development 37 Psychological Contract Violation 37 Employee Benefits as Constituting Psychological Contracts 38 32 Defining Pension Plans and Welfare Plans 69 Scope of Coverage for Pension Plans and Welfare Plans 70 Title I: Protection of Employee Rights 71 Title II: Amendments to the Internal Revenue Code Relating to Retirement Plans 73 Title III: Jurisdiction, Administration, Enforcement, Joint Pension Task Force, and Other Issues 73 Title IV: Plan Termination Insurance 73 The Consolidated Omnibus Budget Reconciliation Act of 1985 74 Table of Contents xi Qualified Domestic Relations Orders 99 Plan Termination Rules and Procedures 99 The Health Insurance Portability and Accountability Act of 1996 75 The Pension Protection Act of 2006 76 The Patient Protection and Affordable Care Act of 2010 77 Equal Employment Opportunity Laws 77 Defined Benefit Plans The Equal Pay Act of 1963 77 Title VII of the Civil Rights Act of 1964 79 The Age Discrimination in Employment Act of 1967 79 The Pregnancy Discrimination Act of 1978 80 The Americans with Disabilities Act of 1990 81 The Civil Rights Act of 1991 82 The Genetic Information Nondiscrimination Act of 2008 83 Summary Defined Contribution Plans PART TWO RETIREMENT, HEALTH CARE, AND LIFE INSURANCE 89 Types of Defined Contribution Plans Chapter 4 Employer-Sponsored Retirement Plans 91 Origins of Employer-Sponsored Retirement Benefits 93 Trends in Retirement Plan Coverage and Costs 93 Qualified vs. Nonqualified Plans 94 Participation Requirements 95 Coverage Requirements 95 Vesting Rules 96 Accrual Rules 97 Nondiscrimination Rules: Testing 97 Top-Heavy Provisions 97 Minimum Funding Standards 98 Social Security Integration 98 Contribution and Benefit Limits 98 Plan Distribution Rules 98 Qualified Survivor Annuities 99 104 106 Individual Accounts 106 Investment of Contributions 107 Employee Participation in Investments 107 Nondiscrimination Rules: Testing 108 Accrual Rules 108 Top-Heavy Provisions 108 Minimum Funding Standard 108 Contribution Limits 108 83 Defining and Exploring Retirement Plans 99 Benefit Formulas 100 Nondiscrimination Rules: Testing 100 Accrual Rules 102 Top-Heavy Provisions 103 Minimum Funding Standards 104 Benefit Limits 104 Plan Termination Rules and Procedures 92 108 401(k) Plans 109 Roth 401(k) Plans 109 Profit-Sharing Plans 109 Stock Bonus Plans 110 Employee Stock Option Plans (ESOPs) 111 Savings Incentive Match Plans for Employees (SIMPLEs) 111 403(b) Tax-Deferred Annuity Plans 111 457 Plans 112 Hybrid Plans 112 Cash Balance Plans and Pension Equity Plans 112 Target Benefit Plans 119 Money Purchase Plans 120 Age-Weighted Profit-Sharing Plans Summary 120 121 Chapter 5 Employer-Sponsored Health-Care Plans 127 Defining and Exploring Health-Care Plans 128 Origins of Health-Care Benefits 130 xii Table of Contents Health-Care Coverage and Costs 131 Types of Medical Expense Benefits 133 Regulation of Health-Care Plans 136 Federal Regulations 136 State Regulations 141 Health Plan Design Alternatives Fee-for-Service Plans 143 Managed Care Plans 143 142 Health Maintenance Organizations 143 Types of Health Maintenance Organizations 144 Preferred Provider Organizations 145 Point-of-Service Plans 145 Features of Health-Care Plans 148 Deductible 149 Coinsurance 150 Out-of-Pocket Maximum 150 Preexisting Condition Clauses 151 Preadmission Certification 151 Second Surgical Opinion 152 Lifetime and Yearly Limits 152 Consumer-Driven Health Care Other Health-Care-Related Benefits 157 152 Dental Insurance 157 Vision Insurance 158 Prescription Drug Benefits 158 Mental Health and Substance Abuse 160 Maternity Care 161 Retiree Health-Care Benefits Summary 163 161 Chapter 6 Employer-Sponsored Disability Insurance, Life Insurance, and Workers’ Compensation 167 Disability Insurance 168 Origins of Disability Insurance and Workers’ Compensation Insurance 169 Coverage and Costs of Disability Programs 170 Short-Term Disability Insurance Programs 170 Long-Term Disability Insurance Programs 172 Funding Disability Insurance Programs 172 Relationships between CompanySponsored Disability Plans and Benefits Laws 173 Life Insurance 175 Origins of Life Insurance 175 Coverage and Costs of Life Insurance 175 Types of Life Insurance Programs 175 Group Term Life Insurance 176 Costs of Group Term Life Insurance 176 Universal Life Insurance 177 Accidental Death and Dismemberment Insurance 177 State Compulsory Disability Laws (Workers’ Compensation) 178 Coverage of Workers’ Compensation Programs 179 Cost of Workers’ Compensation Insurance 179 Financing Workers’ Compensation Programs 179 Workers’ Compensation Claims 180 Types and Amounts of Workers’ Compensation Benefits 181 Employers’ Rights under Workers’ Compensation Programs 183 Summary 185 Chapter 7 Government-Mandated Social Security Programs 191 Origins of Social Security 192 Introduction to the Social Security Programs 192 Employers Required to Participate in Social Security Programs 193 Administration of Social Security Programs 194 Social Security Numbers 194 Table of Contents xiii Old-Age, Survivor, and Disability Insurance (OASDI) 195 Qualifying for OASDI Benefits 195 Determining Benefit Amounts 195 Old-Age Benefits 196 Survivor Benefits 199 Disability Benefits 200 Medicare 203 Eligibility Criteria for Medicare Benefits 203 Medicare Part A Coverage 204 Medicare Part B Coverage 205 Medigap Insurance 205 Medicare Part C: Medicare Advantage 205 Medicare Prescription Drug Benefit 206 Medicare as the Primary or Secondary Payer 206 Financing OASDI and Medicare Programs 208 Unemployment Insurance 209 Eligibility Criteria for Unemployment Insurance Benefits 210 Unemployment Insurance Benefit Amounts 212 Summary 213 PART THREE SERVICES 217 Jury Duty and Witness Duty Leaves Military Leave 228 Nonproduction Time 228 On-Call Time 229 Sabbatical Leave 230 Volunteerism 231 227 Leave under the Family and Medical Leave Act of 1993 232 Key Provisions 232 Returning from FMLA Leave 234 Revisions to the FMLA 234 State and Local Family Leave Laws 235 Flexible Work Arrangements 236 Flextime Schedules 236 Compressed Workweek Schedules Telecommuting 237 Summary 237 238 Chapter 9 Accommodation and Enhancement Benefits 243 Defining Accommodation and Enhancement Benefits 244 Rationale for Accommodation and Enhancement Benefits 244 Origins of Accommodation and Enhancement Benefits 245 Chapter 8 Paid Time-Off and Flexible Work Schedule Benefits 219 The Mental and Physical Well-Being of Employees and Family Members 246 Defining and Exploring Paid Time-Off Programs 220 Paid Time-Off Practices 221 Family Assistance Programs 256 Adoption Assistance Programs 256 Educational Benefits for Employees 257 Holidays 222 Vacation 223 Sick Leave 225 Personal Leave 226 Integrated Paid Time-Off Policies, or Paid Time-Off Banks 226 Parental Leave 227 Bereavement or Funeral Leave 227 Employee Assistance Programs Wellness Programs 252 246 Educational Assistance 258 Tuition Reimbursement 259 Scholarships 259 Support Programs for Daily Living Transportation Services Physical Fitness 260 Summary 261 260 260 xiv Table of Contents PART FOUR EXTENDING EMPLOYEE BENEFITS: DESIGN AND GLOBAL ISSUES 265 Chapter 10 Managing the Employee-Benefits System 267 Characteristics Distinguishing between Nonqualified Plans and Qualified Plans 292 ERISA Qualification Criteria 293 Funding Status 293 Mandatory Retirement Age 294 Nonqualified Retirement Plans for Executives 294 A Comparison of Traditional Benefits Plans and Flexible Benefits Plans 268 A One-Size-Fits-All Approach 268 Employer Choice to Customize Benefits 269 Cafeteria Plans under Section 125 270 Types of Flexible Benefit Plan Arrangements 271 Communicating the Employee-Benefits Program 274 Legal Considerations in Benefits Communication 275 The “Good Business Sense” of Benefits Communication 277 Managing the Costs of Employee Benefits 279 Employee Contributions 280 Waiting Periods 280 High-Deductible Plans 280 Employee Education 281 Utilization Reviews 281 Case Management 282 Provider Payment Systems 282 Lifestyle Interventions 283 Excess Benefit Plans 295 Supplemental Executive Retirement Plans (SERPs) 295 Contrasting Excess Benefit Plans and SERPs 296 Funding Mechanisms 296 General Assets 297 Corporate-Owned Life Insurance 297 Split-Dollar Life Insurance 298 Rabbi Trusts 298 Secular Trusts 299 Employee-Owned Annuities 299 Stock Options and Stock Purchase Plans 299 Basic Terminology 299 Stock Options 300 Restricted Stock Plans and Restricted Stock Units 300 Stock Appreciation Rights 301 Phantom Stock Plans 301 Employee Stock Purchase Plans 301 Separation Agreements 301 Golden Parachutes 302 Platinum Parachutes 302 Reporting and Disclosure Requirements 303 Outsourcing the Benefits Function Summary 285 284 Chapter 11 Nonqualified Deferred Compensation Plans for Executives 289 Defining Executive Employment Status Who Are Executives? 290 Key Employees 290 Highly Compensated Employees Defining Nonqualified Deferred Compensation Plans (NQDC) 291 291 290 Securities Exchange Act Wall Street Reform and 2010 (Dodd-Frank Act) Concluding Comments Summary of 1934 303 Consumer Protection Act of 306 306 307 Chapter 12 Global Employee Benefits at a Glance 311 Quantifying Elements of Employee Benefits Outside the United States 312 Table of Contents xv North America 313 Japan 326 India 328 Canada 314 Mexico 315 South America Africa 317 319 France 320 Germany 322 United Kingdom Asia 330 Australia 331 Summary 332 Brazil 317 Argentina 318 Europe 330 South Africa Glossary Index 323 324 The People’s Republic of China 325 339 363 This page intentionally left blank Part One Introduction to Employee Benefits This page intentionally left blank Chapter One Introducing Employee Benefits Chapter Outline Defining and Exploring Employee Benefits Defining Employee Benefits The Fundamental Roles and Sources of Employee Benefits Employee Benefits in the Total Compensation Scheme The Field of Employee-Benefits Practice Legally Required Benefits Discretionary Benefits Origins of Employee Benefits Legal and Regulatory Influences on Discretionary Benefits Practices Strategic Planning for a Benefits Program Basic Strategic Planning Concepts Approaches to Strategic Benefits Planning Information Used in Strategic Benefit Planning External Environment Internal Environment Key Terms Cases 1. Understanding Your Employee Benefits: Understanding a Job Offer 2. Managing Employee Benefits: Strategic Benefit Planning at Makers Crafts Endnotes Learning Objectives In this chapter, you will gain an understanding of: 1. The fundamentals of employee benefits and fit in the total compensation scheme. 2. The field of employee-benefits ­practice. 3. Legal and regulatory influences on discretionary employee-benefits practices. 4. The strategic importance of benefits and approaches to strategically planning a benefits program. 5. Information used to develop strategic benefits plans. Discussion Questions 3 4 Part One Introduction to Employee Benefits Welcome to Employee Benefits: A Primer for Human Resource ­Management Professionals. Understanding employee-benefits practices is a worthwhile endeavor no matter whether you plan to become a specialist working in an employee-benefits department, a human resource generalist, or a manager in any department. For instance, employee-benefits professionals are experts in paid timeoff policy design. These experts work with HR generalists who oversee all HR activities for employee groups and share developments in the employee-benefits offerings. Employee-­benefits professionals also work with managers who are ultimately responsible for carrying out HR policies such as approving paid time off or knowing when to encourage a distressed worker to seek help through an employee assistance program. Let’s not forget, most people work for a living and either currently have or will likely have access to at least one employee benefit. As a bonus, this book will help you to understand the components of your benefits and the employer’s rationale for offering them. DEFINING AND EXPLORING EMPLOYEE BENEFITS Let’s start off with a brief definition of employee benefits. Next, we put employee benefits in the context of total compensation systems in companies (Exhibit 1.1) and from there expand the definition of employee benefits. Finally, we examine strategic considerations essential for establishing and maintaining effective employee-benefits programs. EXHIBIT 1.1 Employee Benefits in the Total Compensation Scheme Total Compensation Core Compensation Hourly wage Annual salary Adjustments to Core Compensation Seniority Cost of living Merit Incentive Person focused Legally Required Employee Benefits Social Security Act Workers’ compensation laws Family & Medical Leave Act Patient Protection and Affordable Care Act of 2010 Discretionary Employee Benefits Disability insurance Life insurance Retirement plans Paid time off Accommodation and enhancement Chapter 1 Introducing Employee Benefits 5 Defining Employee Benefits Employee benefits refer to compensation other than an hourly wage or salary. Examples of specific employee benefits include paid vacation, health-care coverage, tuition reimbursement, and many more. To organize the vast amount of benefits information efficiently, it is helpful to group benefits based on the role that the benefits serve for recipients and the source of the benefits. The Fundamental Roles and Sources of Employee Benefits Three fundamental roles characterize benefits programs: protection, paid time off, and accommodation and enhancement. Protection programs provide family benefits, promote health, and guard against income loss caused by catastrophic factors such as unemployment, disability, and serious illnesses. Paid time-off policies compensate employees when they are not performing their primary work duties under particular circumstances such as vacation or illness. Accommodation and enhancement benefits promote opportunities for employees and their families. Employers may choose to offer one or more of these benefits, including wellness programs, flexible work schedules, and educational assistance. Employee benefits derive from two broad sources. First, the U.S. federal government requires that most employers, employees, or both make contributions so that certain ­government-sponsored benefits can be provided to employees. These are referred to as legally required benefits. Laws such as the Social Security Act of 1935 mandate a variety of programs designed to provide income to retired workers, disability income, survivor benefits, and health care for older Americans. Legally required benefits can take other forms such as workers’ compensation insurance, which the employer purchases and administers. And, it should be noted that some cities and states have legislation that enhance federal government benefits such as paid sick leave. Second, companies may choose to offer additional benefits such as educational benefits and retirement savings plans as just two examples. Choice benefits are referred to as discretionary benefits. Exhibit 1.2 lists typical employee benefits offered in U.S. companies. As this exhibit shows, legally required benefits focus on protection, and companies may choose to offer additional protection programs, which often enhance or supplement legally required benefits. For instance, discretionary disability protection, when added with Social Security disability insurance, could generate a higher income stream than would otherwise be possible. Prior to the passage of the Patient Protection and Affordable Care Act of 2010, which mandates that most companies provide health-care coverage, companies offered healthcare benefits on a discretionary basis. However, some companies still treat health care as a discretionary benefit. In lieu of offering health-care benefits, they are willing to pay a penalty to the federal government based on provisions of the law. More recently, it is possible that employer-sponsored health care will return to discretionary benefit status because President-elect Donald Trump has promised to seek the law’s repeal. Employee Benefits in the Total Compensation Scheme Employee benefits are a part of a company’s total compensation system. Total compensation represents both core compensation (wages, salaries, and adjustments), and 6 Part One Introduction to Employee Benefits EXHIBIT 1.2 Typical Employee Benefit Offerings in the United States Legally Required Benefits Old-Age, Survivor, and Disability Insurance (OASDI) Health-care coverage Prescription drugs Mental health and substance abuse Maternity care Medicare Unemployment insurance Workers’ compensation Family and Medical leave Discretionary Benefits Protection Programs Dental care Vision care Life insurance Disability insurance (short- and long-term) Retirement programs Paid Time Off Holidays Vacation Sick leave Personal leave Bereavement or funeral leave Sabbatical leave Jury duty and witness duty leaves Military leave Nonproduction time Volunteerism Accommodation and Enhancement Programs Employees’ and family members’ mental and physical well-being Employee assistance programs Wellness programs Family assistance programs Educational benefits for employees Educational assistance programs Tuition reimbursement programs Scholarship programs Support programs for daily living Transportation services Physical fitness employee benefits represent compensation other than wages or salaries (see Exhibit 1.1). Compensation professionals establish core compensation programs to reward employees according to their job performance levels or for acquiring job-related knowledge or skills. Monetary compensation lies at the heart of core compensation. After briefly defining specific core and employee-benefits practices, we will subsequently discuss the origins of employee benefits. Understanding the origins enables employee-benefits professionals to better understand the rationale for benefits design. Core Compensation Employees receive base pay, or money, for performing their jobs. Companies disburse base pay to employees in one of two forms. Employees can earn an hourly pay, or a wage, for each hour worked, or they can earn a salary for performing their jobs, regardless of the number of hours worked. Companies measure salary on an annual basis. Adjustments to Core Compensation Over time, employers may choose to adjust employees’ base for one or more reasons: increases in the cost of living, differences in employees’ job performance, or differences in employees’ attainment of job-related knowledge and skills. These elements are defined next. Chapter 1 Introducing Employee Benefits 7 Cost-of-living adjustments (COLAs) represent periodic base-pay increases often set to periodic changes in the U.S. Bureau of Labor Statistics’ Consumer Price Index (CPI). COLAs enable workers to maintain purchasing power by having their base pay adjusted for inflation. Over time, most everything we buy costs more money, such as the price of a gallon of milk. Most companies choose not to apply COLAs to base pay. However, this practice is a common feature in the unionized workforce and in government employment. How exactly does inflation affect purchasing power? Let’s assume, for example, that a local grocery store employs college students, paying them $11 per hour. Let’s also assume that a student works 10 hours per week, for a total of $110. Further, let’s assume a student typically drives his car, paying $20 per week for gasoline. As gas prices rise, the weekly gasoline cost could increase to $30. As long as the hourly wage rate remains the same, the student will have 10 fewer dollars available for other pursuits. Rising costs erode purchasing power when wages do not increase accordingly. Seniority-pay systems reward employees with periodic additions to base pay, according to length of service. Over time, employees presumably refine existing skills or acquire new ones that enable them to work more productively. This rationale comes from human capital theory, which states that employees’ knowledge and skills generate productive capital, known as human capital. A person employed in a company for a long time knows rules and procedures from which he or she develops the skills (i.e., human capital) necessary to perform a job more quickly than newly hired employees. Today, most unionized private-sector and public-sector organizations continue to base salary on seniority or length of employee service, though the number of unionized workplaces is steadily declining. In 2015, the overall unionization rate was 11.1 percent. During the same period, unionization in the private sector was 6.7 percent and 35.2 percent in the public sector. Members of union-bargaining units whose contracts include seniority provisions, usually rank-and-file as well as clerical workers, receive automatic raises based on the number of years they have been with the company. In the public sector, most administrative, professional, and even managerial employees receive such automatic pay raises.1 Merit-pay programs assume that employees’ compensation over time should be determined based on differences in job performance. Employees earn permanent increases to base pay according to their performance, which rewards excellent effort or results, motivates future performance, and helps employers retain valued employees. Merit pay increases are expressed as a percentage of current base pay, with higher percentage increases for better performers. For instance, an employee currently earning $25,000 annually receives a 10 percent merit pay increase, making her total annual pay $27,500 after the pay raise takes effect: [$25,000 + (10 percent of $25,000 = $2,500)]. In 2016, employees earned average merit increases of 3.0 percent across all industries, and the projected average increase for 2017 was 3.1 percent.2 This average increase did not vary significantly, except for nonexempt hourly employees whose average merit increase was 2.9 percent in 2016. In addition, most companies relied on market-based pay increases. Most U.S. companies rely on merit pay to recognize employee performance. Incentive pay rewards employees for partially or completely attaining a predetermined work objective. Incentive pay is defined as compensation other 8 Part One Introduction to Employee Benefits than base wages or salaries that fluctuates according to the attainment of individual or group goals (for example, $1,000 to a customer sales representative whose customer-service ratings increased each month over a six-month period), or company earnings (for instance, employees share 2 percent of company profits when the company substantially exceeds its performance projections). Commonly used incentive plans include piece rate, gain sharing, and profit sharing. Person-focused pay rewards employees for acquiring new knowledge and skills through designated curricula sponsored by an employer. This approach recognizes the range, depth, and types of skills or knowledge employees are capable of applying productively to their jobs following training. This feature distinguishes payfor-knowledge plans from merit pay and incentive pay, which reward actual job performance. Some targeted studies and anecdotal information suggest that companies of various sizes use person-focused pay programs. Many of the companies known to be using this kind of pay system employ between approximately 150 and 2,000 employees, the majority operate in the manufacturing industry, and the average age of the companies is approximately 10 years.3 Overall, the pay method is least commonly used among all U.S. companies, in part because companies fear training employees to join the competition later. THE FIELD OF EMPLOYEE-BENEFITS PRACTICE Virtually every company offers at least one benefit to employees, and most companies offer several. This book emphasizes the importance of benefits in achieving legal compliance and competitive advantage and how companies achieve these goals. Meeting these imperatives requires benefits professionals who work in departments within the broader human resource function or as external consultants offering expert advice. Employees in benefits departments span the organizational hierarchy, including clerical staff members, managerial employees, and executives. One survey revealed that the typical number of employees working in a company’s benefits department is 5.3, of whom 3 are professional or managerial staff and 2.3 are support or clerical staff.4 In addition, the number of staff members varied by company size, ranging from an average of 2.9 employees in smaller companies to 11.3 in larger companies. So, with which issues do employee-benefits professionals work? According to the Occupational Outlook Handbook: Benefits managers plan, direct, and coordinate retirement plans, health insurance, and other benefits that an organization offers its employees.5 Performance standards are established by members of the profession rather than by outsiders. Most professions also have effective representative organizations that permit members to exchange ideas of mutual concern. Several well-known organizations serve the benefits profession. Among the more Chapter 1 Introducing Employee Benefits 9 prominent are the International Foundation of Employee Benefit Plans and WorldatWork. Opportunities for employment as compensation and benefits managers are projected to grow at an annual rate of 6 percent through 2024.6 The median annual compensation for compensation and benefits managers was $108,070, which is more than double the median annual earnings for all jobs.7 The salary levels vary on a number of factors, including relevant work experience, educational credentials, and industry. For example, the mean annual compensation was lowest in local government ($95,880) settings and highest in the financial securities industry ($158,760). While the employee-benefits group is on the same team as HR, inevitably tensions arise. Employee-benefits professionals are inclined to develop the benefits program, but competition for limited funds creates challenges. For instance, recruitment professionals may wish to purchase costly selection tests to improve the quality of hires. Training and development professionals vie for greater resources to incorporate expensive technology into curricula. Let’s take a closer look at the components of benefits packages to gain an appreciation of the scope of employee benefits. Legally Required Benefits Legally required benefits are mandated by several laws, some of which include: the Social Security Act of 1935 (Chapter 7), various state workers’ compensation laws (Chapter 6), the Family and Medical Leave Act of 1993 (Chapter 8), and the Patient Protection and Affordable Care Act of 2010 (Chapter 5). All provide protection programs to employees and their dependents. A basic summary of each benefit follows, with detailed treatment deferred to the relevant chapters. The Social Security Act of 1935 The economic devastation of the Great Depression era prompted the federal government into action because most people had used up their life savings to survive, and opportunities for gainful employment were scarce. The Social Security Act of 1935 set up two programs: a federal system of income benefits for retired workers, and a system of unemployment insurance administered by the federal and state governments. Amendments to the Social Security Act established the disability insurance and Medicare programs. Old-Age, Survivor, and Disability Insurance (OASDI) refers to the programs that provide retirement income, income to the survivors of deceased workers, and income to disabled workers and their family members. Medicare serves nearly all U.S. citizens aged at least 65, as well as disabled Social Security beneficiaries, by providing insurance coverage for hospitalization, convalescent care, major doctor bills, and prescription drug coverage. State Compulsory Disability Laws (Workers’ Compensation) Workers’ compensation insurance came into existence during the early decades of the 20th century, when industrial accidents were very common and workers 10 Part One Introduction to Employee Benefits suffered from occupational illnesses at alarming rates.8 During the early years of industrialization of the U.S. economy, no laws required employers to ensure the health and safety of employees. Seriously injured and ill workers were left with virtually no recourse because social insurance programs to protect such workers were nonexistent. State compulsory disability laws created workers’ compensation programs. Workers’ compensation insurance programs are designed to cover employee expenses incurred in work-related accidents or injuries. The Family and Medical Leave Act of 1993 The Family and Medical Leave Act (FMLA) provides job protection to employees in cases of a family or personal medical emergency. FMLA permits eligible employees to take up to 12 workweeks of unpaid leave during any 12-month period. These employees retain the right to return to the position they left when the leave began or to an equivalent position with the same terms of employment, including pay and benefits. The passage of the FMLA reflected growing recognition that the parents of many employees are becoming elderly, rendering them susceptible to serious illnesses or medical conditions as well as the changing role of men regarding child care. The Patient Protection and Affordable Care Act of 2010 The Patient Protection and Affordable Care Act (PPACA), enacted on March 23, 2010, is a comprehensive law that requires employers to offer health-care benefits to employees. Health care covers the costs of a variety of services that promote sound physical and mental health, including physical examinations, diagnostic testing (X-rays), surgery, and hospitalization. Companies can choose to rely on one or more of four broad approaches to providing health care, including fee-for-service plans, alternative managed-care plans, point-ofservice plans, and consumer-driven health care. Companies may offer additional care options: Dental care benefits may cover routine preventative procedures and necessary procedures to help restore the health of teeth and gums. Vision care plans usually cover eye examinations, prescription lenses, frames, and fitting of glasses. Prescription drug plans cover a portion of the costs of legal drugs. Mental health and substance abuse plans cover the costs for treating mental health ailments such as clinical depression and alcohol or chemical substance abuse. Discretionary Benefits Discretionary benefits fulfill three main roles. The first, protection programs, most closely parallels legally required benefits by offering protections to employees and family members due to income loss or ill health. The second, paid time off, affords employees time off with pay for many purposes, including illness or to celebrate designated holidays. The third variety, accommodation and enhancements, offers improvements to employees and their families in many ways. Wellness programs and educational assistance programs are just two examples. Chapter 1 Introducing Employee Benefits 11 Protection Programs Disability Insurance Disability insurance replaces income for employees who become unable to work on a regular basis because of an illness or injury. E ­ mployer-sponsored disability insurance is more encompassing than workers’ compensation because these benefits generally apply to both work- and non- work-related illness or injury. Disability insurance programs are reviewed in greater detail in Chapter 6. Life Insurance Employer-sponsored life insurance protects family members by paying a specified amount upon the employee’s death. Most policies pay some multiple of the employee’s salary—for instance, benefits paid at twice the employee’s annual salary. Employees usually have the option of purchasing additional coverage. Frequently, employer-sponsored life insurance plans also include accidental death and dismemberment claims, which pay additional benefits if death was the result of an accident or if the insured incurs accidental loss of a limb. Life insurance is reviewed in Chapter 6. Retirement Plans Retirement plans, provide income to individuals and beneficiaries throughout retirement. Individuals may participate in more than one retirement plan. Companies may establish retirement plans as defined con­ tribution plans, defined benefit plans, or hybrid plans that combine features of defined contribution and defined benefit plans. Under a defined contribution plan, employees make annual contributions to their accounts, based on chosen percentage of annual pay. At their discretion, companies make matching contributions, which are determined by a formula. The amount each participant receives in retirement depends on the performance of the selected investment choices (for example, company stock or government bonds). A defined benefit plan awards a monthly sum equal to a percentage of a participant’s preretirement pay multiplied by the number of years worked for the employer. The level of required employer contributions fluctuates from year to year as necessary to ensure that promised benefits will be honored. Retirement plans are discussed in Chapter 4. Paid Time Off The second type of discretionary benefits is paid time off. Paid time-off policies compensate employees when they are not performing their primary work duties. Companies offer most paid time off as a matter of custom, particularly paid holidays, vacations, and sick leave. In unionized settings, paid time-off provisions are specified within the collective bargaining agreement. Relatively common paid time-off practices are jury duty, funeral leave, military leave, holidays, and vacations. Accommodation and Enhancement Programs Accommodation and enhancement benefits promote opportunities for employees and family members. These benefits are discussed in Chapter 9. Following are four objectives, with an example stated in parentheses: ▯▯ Mental and physical well-being of employees and family members (e.g., stress management). 12 Part One Introduction to Employee Benefits ▯▯ ▯▯ ▯▯ Family assistance programs (e.g., child care). Skills and knowledge acquisition through educational programs (e.g., tuition reimbursement). Opportunities to manage daily challenges (e.g., transportation services). Basic Design Considerations for Discretionary Benefits Employee-benefits professionals possess substantial leeway when designing discretionary benefits. Numerous design considerations are reviewed throughout this book as specific benefits are examined, and general design considerations are discussed in Chapter 10. As noted later in this chapter and in Chapter 2, companies strive to offer cost-effective benefits that will promote the recruitment and retention of highly qualified employees. Chapter 2 addresses these issues from a psychological perspective as well as from an economic perspective. The following is a basic introduction to common features of employeebenefits programs. ▯▯ ▯▯ ▯▯ ▯▯ ▯▯ Eligibility provisions. Companies must decide whether to limit participation to current employees, their dependent family members, and survivors of deceased current or retired employees. Companies may limit participation to current employees. For instance, many companies exclude part-time employees as a cost-control measure. Kinds of benefits. Which benefits do companies offer to eligible individuals? Companies may sponsor a variety of broad benefits, including retirement plans, health care, and paid time off. Then they select specific benefits from these broad categories. For instance, defined contribution retirement plans are often preferred because these plans are more cost-effective than defined benefit plans. Level of benefits. Companies choose benefits based on maximum benefit limits. For example, life insurance policies specify the dollar benefit amount for the death of an employee. Waiting periods. Waiting periods specify the minimum number of months an employee must remain employed before becoming eligible for one or more benefits. Some waiting periods correspond with the length of probationary periods, while others are limited by law. Companies impose probationary periods to judge a newcomer’s job performance, and they explicitly reserve the right to terminate employees who demonstrate low job performance. Financing benefits. Employers choose from four approaches: noncontributory, contributory, employee-financed programs, or some combination. Noncontributory financing means that the company pays the total costs for designated discretionary benefits. Under contributory financing, the company and its employees share the costs. Under employee-financed benefits, employees bear the entire cost. The majority of benefit plans today are contributory, largely because benefits costs have risen so dramatically. Chapter 1 ▯▯ ▯▯ Introducing Employee Benefits 13 Employee choice. Traditionally, a company provided the same benefits to most or all employees. Increasingly, companies offer employees varying degrees of choice. Flexible benefits plans enable employees to choose from among a set of benefits and different levels of these benefits (Chapter 10). The increasing diversity of the workforce has made standardized benefits offerings less practical because of greater differences in needs and preferences for particular benefits. For instance, workers with preschool-age children find day-care assistance programs most appealing, and workers nearing retirement age find value in company-sponsored retiree health-care benefits. Voluntary benefits provide additional options. Voluntary benefits are supplemental benefits that companies offer on an employee-financed basis, whereas flexible benefits provide employees with a choice from a menu of benefits, which follow contributory or noncontributory financing approaches. Examples of voluntary benefits include identity theft protection, home or renter’s insurance, college savings plans, or, even pet insurance. Why offer these benefits when employees can purchase them outside the employment setting? Employers negotiate a lower rate than employees could ascertain on an individual basis. Also, the variety of discounted benefits should be appealing to a diverse workforce. For example, younger employees with children may find a college savings plan an attractive benefit compared to employees approaching retirement whose children have already completed their education. Communication. Oftentimes, employees either are unaware of or undervalue their benefits. Communicating the features and costs of benefits is essential. Effective communication creates an awareness of, and appreciation for, the way current benefits improve the financial security and physical and mental well-­ being of employees. Origins of Employee Benefits Different forces account for legally required and discretionary employee benefits. The U.S. government established programs to protect individuals from catastrophic events such as disability and unemployment. As highlighted earlier, legally required benefits are protection programs that attempt to promote health, maintain family income streams, and assist families in crisis. Historically, legally required benefits provided a form of social insurance, which were prompted largely by the rapid growth of industrialization in the United States during the late 19th and early 20th centuries as well as the Great Depression of the 1930s. Early social insurance programs were designed to minimize the possibility of destitution for individuals who were unemployed or became severely injured while working. In addition, social insurance programs aimed to stabilize the well-being of dependent family members. Further, early social insurance programs enabled retirees to maintain subsistence income levels. These objectives remain the cornerstones of today’s benefits practices. 14 Part One Introduction to Employee Benefits The first signs of contemporary discretionary employee benefits were evident in the late 1800s, when large companies such as American Express offered retirement plans. For the next few decades, the development in employee-benefits practice resulted from government legislation. Then, discretionary benefits offerings became more prominent in the 1940s and 1950s due in large part to federal government wage freezes. Employee benefits were not subject to those restrictions, allowing expansion of discretionary benefits as an alternative to wage increases or as a motivational tool. During that period, the term welfare practices described some of the employee benefits. Welfare practices were “anything for the comfort and improvement, intellectual or social, of the employees, over and above wages paid, which is not a necessity of the industry nor required by law.”9 The opportunities available to employees through welfare practices varied. For instance, some employers offered libraries and recreational areas, while others provided financial assistance for education and home improvements. In addition, employer sponsorship of health care became common. Employee unions also contributed directly to the increase in employee welfare practices. The National Labor Relations Act (NLRA) of 1935 legitimized bargaining for employee benefits. Union workers have access to more benefits, and lucrative ones, than nonunion employees do.10 Still, unions contributed indirectly to the rise in benefits offerings in nonunion settings. Nonunion companies strive to minimize unionization by offering their employees benefits comparable to those received by employees in union companies. Employees typically view employer-sponsored benefits as entitlements. Anecdotal evidence suggests that most employees still feel this way: Company membership entitles them to benefits because participation in benefits programs are not tied to job performance. Until recently, companies also treated virtually all elements of benefits as entitlements. However, rising benefits costs, increased foreign competition, and the so-called Great Recession (2007–2009) led companies to question this entitlement ethic. Increasingly, companies are shifting responsibility for the cost of some benefits to employees. For example, in Chapter 5, employer-sponsored high-deductible health care plans are discussed. LEGAL AND REGULATORY INFLUENCES ON DISCRETIONARY BENEFITS PRACTICES While employers are free to offer discretionary benefits, specific laws influence the application of these practices. To understand these influences, it is necessary to distinguish between private-sector employers and governmental employers, because different regulations influence discretionary benefits practices in these sectors of the U.S. economy. The private sector refers to nongovernmental employers that strive to maximize profits or offer charitable services to the public in need (nonprofit companies). Apple and PepsiCo are examples of for-profit companies, Chapter 1 Introducing Employee Benefits 15 and the American Red Cross and the United Way are examples of nonprofit companies. In 2016, private-sector companies employed about 122 million persons—all U.S. civilian employees, and most of the companies were for-profit. Profit maximization is the foundation of the U.S. economy. Private-sector employers strive to increase profits, market share, and returns on investment for the owners and shareholders. Employers expect workers to be as productive as possible to promote these goals. At the same time, containing pay and benefits costs contributes to profit maximization. Conflicting goals between employees and profit-oriented employers necessitate regulations to protect employees from unfair treatment. The following excerpt captures the natural clash between employers and employees, employer profit maximization goals, and employee desires for equitable and fair treatment: As competition increased in the textile industry, the original concern of the mill owners for their employees gave way to stricter controls which had nothing to do with the well-being of the workers. Employers reduced wages, lengthened hours, and intensified work. For a workday from 11.5 to 13 hours, making up an average week of 75 hours, the women operatives were generally earning less than $1.50 a week (exclusive of board) by the late 1840s, and they were being compelled to tend four looms whereas in the 1830s they had only taken care of two... [The manager] ordered them [the female textile workers] to come before breakfast. “I regard my work-people just as I regard my machinery. So long as they can do my work for what I choose to pay them, I keep them, getting out of them all I can.”11 Employees strive to attain high wages, comprehensive benefits, safe and healthful work conditions, and job security. Prior to the passage of the National Labor Relations Act, employees were not required to negotiate terms and conditions of employment. As a result, many workers were subjected to unsafe and unhealthful working conditions, inadequate pay and benefits, and excessive work hours. Today, employment legislation and labor unions protect the rights and status of workers, and employer abuses are much less prevalent than before legal protections and labor unions. For example, prior to the Employee Retirement Income Security Act (ERISA) of 1974, employees could easily lose company retirement benefits after decades of service simply because the employer chose to use retirement funds for other purposes that benefited company profits. Also, employees did not possess the right to keep their retirement assets if they left a company before reaching retirement age. Years of congressional testimony and investigations led to the passage of ERISA based on the conclusion that employer-­sponsored retirement plans were essential to the country’s economic security and as an essential supplement to government-sponsored retirement programs through the Social Security Act of 1935. Public-sector employers include the U.S. federal government, state governments, and local governments. Approximately 2 million people are employed in the federal government’s three branches: executive, judicial, and legislative. ­Public-sector employers work on behalf of citizens, and none exists to make 16 Part One Introduction to Employee Benefits profits. At the state and local levels, public-sector employers include local police forces, community colleges, state colleges and universities, court systems, social service agencies, and public works departments (such as road maintenance), totaling approximately 20 million workers. Although government employers do not seek profits, they still must operate within a budget to provide pay and benefits to employees and services to citizens. Also, the government is a buyer and consumer of the products and services that private-sector companies produce. Indeed, the government spends more than $1 trillion each year on these items. The government uses energy to run its buildings, and it engages in contracts with private-sector companies for a multitude of goods and services ranging from building construction to multimillion-dollar defense systems. Various laws require the government to pay contract employees the customary wage in the local area. This is an important fact because many benefits, such as retirement earnings, are tied to pay levels. STRATEGIC PLANNING FOR A BENEFITS PROGRAM The development of successful benefits programs matches the priorities of ongoing strategic planning efforts within companies. One survey found that high-performing companies align total compensation programs with business objectives.12 Many U.S. companies build their success through creating and marketing innovative products and services to customers. Increasingly, companies emphasize the importance of employing diverse workforces to promote the inventive processes necessary for innovation. For instance, Bristol-Myers Squibb pledges to “foster a globally diverse workforce and a companywide culture that encourages excellence, leadership, innovation, and a balance between our personal and professional lives.”13 Basic Strategic Planning Concepts Strategic planning entails a series of judgments, made under uncertainty, that companies direct toward making strategic decisions. Companies base their decisions on environmental scanning activities, which are discussed later in this chapter. Business professionals make two kinds of decisions: strategic decisions and, in the context of employee benefits, the design of specific practices such as retirement plans. Briefly, strategic decisions guide the activities of companies in the market. The choice about the design of employee-benefits practices support the fulfillment of strategic decisions, which are discussed shortly. Exhibit 1.3 shows the relationship between strategic decisions as well as the design of employee-benefits practices. Strategic planning supports business objectives. Company executives communicate business objectives in competitive strategy statements. Competitive strategy refers to the planned use of company resources—technology, capital, and human resources (HR)—to promote and sustain competitive advantage. For example, ExxonMobil Corporation, a company in the oil and gas exploration industry, strives to be the world’s premier petroleum and petrochemical company by achieving superior financial and operating results while simultaneously adhering to high Chapter 1 EXHIBIT 1.3 Introducing Employee Benefits 17 Strategic Decisions General Competitive Strategy Relationship between Strategic Decisions and EmployeeBenefits Practices Human Resource Strategy Benefits Strategy General EmployeeBenefits Practices Specific EmployeeBenefits Practices (Retirement Plan Alternatives) Health Care Life Insurance Retirement Plans Paid Time Off Defined Benefit Plans Defined Contribution Plans Cash Balance Plans Money Purchase Plans Age-Weighted Profit Sharing Offer of One or More Plans Specific ethical standards.14 Eli Lilly and Company, a manufacturer of pharmaceutical products, pursues a competitive strategy, which focuses on creating innovative medicines that improve patient health outcomes.15 Human resource executives collaborate with other company executives to develop HR strategies, which specify the use of multiple HR practices. These statements are consistent with a company’s competitive strategy. For example, Eli Lilly is well known for the innovative environment that it creates for employees to make discoveries for pharmaceutical products that will enhance the life of people throughout the world.16 Compensation and benefits managers and executives work with the lead HR executive and the company’s chief budget officer to prepare total compensation strategies. Total compensation strategies describe the use of compensation and benefits practices that support both HR strategies and competitive strategies. Benefits professionals craft benefits strategies based on information contained in strategic benefit plans. Strategic benefit plans detail different scenarios that may reasonably affect the company, and these plans emphasize long-term changes in how a company’s benefit plan operates.17 Companies establish strategic benefit plans based on the interpretation of pertinent information in the external and internal environments, which will be discussed shortly. 18 Part One Introduction to Employee Benefits At Lilly, it is evident that the use of compensation and benefits practices supports both human resource strategies and competitive strategies. Eli Lilly is well known for offering a balanced compensation and benefits program which recognizes employee contributions and embraces employees through recognition of their needs outside the workplace. As Exhibit 1.3 shows, managers throughout a company make decisions to specify policy for promoting competitive advantage. Benefits decisions are based on two questions: Does offering particular benefits (e.g., paid vacations) support the company’s benefits strategy? and What is the optimal design (of vacation benefits)? Descriptions of five employee benefits practices at ExxonMobil follow. 1. Education assistance—After employment, ExxonMobil reimburses 100 percent of college-related expenses for approved courses to maintain or improve your skills. 2. Matching gifts program—Three-to-one matching funds for employee and alumni donations to their alma mater. 3. Volunteer involvement program—Grant moneys awarded for volunteering at eligible nonprofit organizations. 4. Flexible work arrangements—Options for adjustable work hours, telecommuting, part-time extensions for family-care needs, and personal time off. 5. Life assistance resources—For child care, elder care, adoption, teen issues, stress, and a variety of other issues.18 Approaches to Strategic Benefits Planning This section begins with a review of two approaches to strategic benefit planning. Afterward, the kinds of information that companies use in this planning process will be touched upon. In most companies, either compensation or benefits-­p rogram executives (in some companies, one person is responsible for both) take the lead in strategic benefit planning. Two possible general approaches characterize strategic benefit planning: top-down and backing-in.19 The top-down approach represents a proactive process: Companies regularly review their entire benefits programs or particular parts of the programs. This process may lead to a reformulation of an entire program or specific parts. Exhibit 1.4 illustrates how the top-down approach unfolds and shows the representative time frames for particular stages of this process. The backing-in approach is a reactive process because companies evaluate the benefits program only when unexpected problems arise. Exhibit 1.5 illustrates how the backing-in approach unfolds, along with the representative time frames for particular stages of this process. For instance, Company A, a manufacturing company, built a reputation as a great place to work for many reasons, including competitive pay and benefits. Recently, excessive turnover has occurred among its assembly-line employees, many of whom have taken jobs at another local EXHIBIT 1.4 A Top-Down Approach to Strategic Benefit Planning: A Conceptual Framework Source: V. Barocas. Strategic Benefits Planning (New York: The Conference Board, 1992), 15. S T R A T E G I C O N G O I N G BENEFIT MISSION INTERNAL INFLUENCES (e.g., employee demographics, benefit utilization data) EXTERNAL INFLUENCES (e.g., government legislation, cost projections, entitlement programs) 3 T O 5 Strategy: Benefit Management Strategy: Innovative & NonERISA Benefits Y E A R S 19 T A C T I C A L OVERALL CORPORATE BENEFIT STRATEGY Strategy: Health & Welfare Plans HEALTH BENEFIT STRATEGY Strategy: Pension & Capital Accumulation Plans DISABILITY BENEFIT STRATEGY DEATH BENEFIT STRATEGY DEFINED BENEFIT PLAN DEFINED CONTRIBUTION PLANS HYBRID PLANS Design and management of health plans, like: Design and management of: Design and management of death plans: Design and management of: Design and management of: Design and management of: medical, dental, vision; prescription drugs; mental health/ substance abuse; retiree health care, etc. long- and shortterm disability plans and workers’ compensation including: term life; group universal life; paid-up life; dependent life; accidental death and dismemberment, etc. defined benefit plan work plans, employee stock option plans, profit sharing programs; savings/ thrift plans; cash or deferred arrangements, etc. money purchase plans; target benefit plans or floor/offset plans 1 T O 3 Y E A R S Management Information Systems (MIS) Benefit Administration Benefit Communications Design and management of: work-family benefits; group legal; relocation benefits; life (e.g., financial, retirement) planning; other banking &/or industry-specific benefits 20 Part One EXHIBIT 1.5 Introduction to Employee Benefits A Backing-in Approach to Strategic Benefit Planning Source: V. Barocas, Strategic Benefits Planning (New York: The Conference Board, 1992), 16. TACTICAL QUESTION: How should our health plan be changed to control employee healthcare costs? 1. Which health-care costs are increasing most rapidly? 3. Which healthcare benefit designs, like managed care, or management procedures, such as utilization review, will provide the greatest return on investment? 2. What programs, like employee assistance programs, wellness, and communications, can be used to ensure cost-effective utilization? 5. How do workers’ compensation and short-/longterm disability programs affect health benefit costs? 4. What is our commitment to retiree health care? 7. Do our health, welfare, and retirement plans form an integrated benefit program? 9. What is the relationship of benefits to compensation and other human resource programs? STRATEGIC QUESTION: How do benefits support the corporate business mission? 6. What is our corporate approach to all health-related benefits? 8. What is our mission regarding employee benefits? manufacturing company. Company A’s HR staff conducted exit interviews to identify possible causes of turnover. Most exit interviews revealed significant dissatisfaction with wage freezes, steep rises in employee contributions for health-care coverage, and the termination of dental benefits. Company management had instituted these changes in response to inflated raw material costs. Its goal was to maintain profits while keeping the prices for company products constant. Intense economic pressures necessitated cuts, and these cuts made it difficult for the company to reduce turnover. INFORMATION USED IN STRATEGIC BENEFIT PLANNING Companies review and interpret several types of information for strategic benefits planning. This process permits business professionals to understand their company’s standing in the market. For example, companies with strong potential to Chapter 1 Introducing Employee Benefits 21 increase sales levels tend to be in better standing than companies with weak potential to maintain or increase sales. Companies in strong standing should be able to devote more financial resources to fund benefits programs than companies in weak standing. Two information sources include the external market environment and the internal company environment. External Environment External environmental factors include: ▯▯ ▯▯ ▯▯ ▯▯ Industry prospects, economic conditions, and forecasts Employer costs for compensation and benefits Government regulation of employee benefits Changing demographics of the labor force Industry Prospects, Economic Conditions, and Forecasts The first two factors, industry prospects and current and anticipated economic conditions, set the backdrop for establishing strategic benefits plans. Industry prospects and economic forecasts set the backdrop for strategic benefits planning because these factors are indicators of the future of companies. Forecasts indicating growth possibly call for strengthening discretionary benefits offerings and levels to help recruit and retain the most-qualified employees. Pessimistic forecasts emphasize the need to save costs by shifting more of the responsibility on employees. For example, more and more companies require that employees share a greater percentage of the cost of health-care plans. Also, there has been a shift away from employer-sponsored defined benefit retirement plans to employer-­ sponsored defined contribution plans, which makes it easier for companies to predict their costs. Further, negative outlooks may lead companies to expand outplacement services (i.e., helping unwanted employees find jobs elsewhere) in anticipation of large-scale layoffs. Still, employers will very likely continue to sponsor employee benefits despite economic conditions for two reasons. First, the Internal Revenue Code and the Employee Retirement Income Security Act create tax advantages for companies that offer qualified benefits plans (see Chapter 3). Employers may exclude limited contributions to these plans from taxable annual income, leading to reduced tax payments to the federal government. Second, as we discuss in Chapter 2, generous benefits offerings facilitate a company’s attempt to attract and retain the best-qualified employees. Although employer-sponsored benefits costs are significant, well-qualified workforces presumably create lucrative advantages for companies, as evidenced by high-quality customer service, competent business functions such as innovative marketing, and research and development. Employer Costs for Compensation and Benefits The U.S. Bureau of Labor Statistics (BLS) regularly publishes current information about employer costs for employee compensation and benefits in the United States (and changes in these costs over time) on its Web site, at www.bls.gov. Benefits 22 Part One Introduction to Employee Benefits professionals may use these data to benchmark current benefits costs against reported averages or as a starting point for budget planning. The following is an excerpt from a BLS news release. In the private sector, employer costs for employee compensation averaged $31.53 per hour worked in September 2015, the U.S. Bureau of Labor Statistics reported today. Wages and salaries averaged $21.98 per hour worked and accounted for 69.7 percent of these costs, while benefits averaged $9.55 and accounted for the remaining 30.3 percent.20 The BLS presents data for average hourly pay and specific benefits for the entire civilian workforce, private industry, state and local governments, and by particular categories: industry, occupational group, region, establishment size, and worker characteristics, such as bargaining status and full- or part-time status. Employer costs per hour worked are available for five major occupational groups. Employer compensation costs also vary by industry, region, and establishment size. Exhibit 1.6 shows employer costs for employee compensation in the private sector, based on some of those characteristics. Preliminary data for 2016 show minute increases. Overall, benefits accounted for approximately 30 percent of total compensation costs in the private sector. At first glance, the cost of specific benefits does not appear to be particularly high because employers spent an average of $9.55 per employee per hour to provide discretionary and legally required benefits. However, aggregating these costs for a one-year period (per employee) paints a different picture. Assuming that a typical service employee works 1,850 hours per year, an employer spends $17,667.50 for each employee annually for employee benefits. Government Regulation of Employee Benefits Four broad forces contribute to an employer’s choice of discretionary benefits and its ability to fund them. The first two, adequacy of legally required benefits and employee expectations, directly influence an employer’s choice. The third, the cost of legally required benefits, influences a company’s ability to fund discretionary benefits. The fourth entails a variety of economic considerations, which will be discussed in Chapter 2. First, the workers’ plight during the industrialization of the U.S. economy and the Great Depression promoted the rise of many legally required benefits. Examples include workers’ compensation and both retirement income and health care under the Social Security Act (Chapters 6 and 7). The U.S. economy is based on free-market principles, not on socialist principles more commonly found in many Eastern European countries and in large segments of the People’s Republic of China where government benefits are represent the lion’s share of support following injury, disability, or in retirement. In addition, the cost of living has risen more quickly than the dollar amount of government benefits. Finally, legislators during the early part of the 20th century could not anticipate the very high costs of health care due, in large part, to advances in medicine and health-care technology. The entire structure of the health-care industry is fundamentally different EXHIBIT 1.6 Employer Costs per Hour Worked for Employee Compensation and Costs as a Percent of Total Compensation: Private Industry Workers, by Major Occupational Group and Bargaining Unit Status, September 2015 Source: U.S. Bureau of Labor Statistics, "Employer Costs for Employee Compensation--September 2015," USDL 15–2329. Occupational Group All Workers Management, Professional, and Related Bargaining Unit Status Service Production, Transportation, and Material Moving Union Nonunion Compensation Component Cost Percent Cost Percent Cost Percent Cost Percent Cost Percent Cost Percent Total compensation Wages and salaries Total benefits Paid leave Vacation Holiday Sick Personal Supplemental pay Overtime and premium1 Shift differentials Nonproduction bonuses Insurance Life Health Short-term disability Long-term disability Retirement and savings Defined benefit Defined contribution Legally required benefits Social Security and Medicare Social Security4 Medicare Federal unemployment insurance State unemployment insurance Workers’ compensation $31.53 21.98 9.55 2.17 1.13 0.66 0.26 0.12 1.04 0.27 0.06 0.71 2.59 0.04 2.44 0.06 0.05 1.25 0.55 0.70 2.51 1.82 1.45 0.36 0.04 0.20 0.45 100.0 69.7 30.3 6.9 3.6 2.1 0.8 0.4 3.3 0.8 0.2 2.2 8.2 0.1 7.7 0.2 0.1 4.0 1.7 2.2 7.9 5.8 4.6 1.2 0.1 0.6 1.4 $55.69 38.55 17.14 4.69 2.49 1.37 0.59 0.25 2.23 0.19 0.10 1.95 3.99 0.08 3.71 0.11 0.09 2.54 1.00 1.54 3.68 3.12 2.46 0.65 0.04 0.20 0.33 100.0 69.2 30.8 8.4 4.5 2.5 1.1 0.4 4.0 0.3 0.2 3.5 7.2 0.2 6.7 0.2 0.2 4.6 1.8 2.8 6.6 5.6 4.4 1.2 0.1 0.4 0.6 $14.57 11.07 3.50 0.56 0.29 0.17 0.07 0.03 0.24 0.11 0.04 0.09 0.93 (2) 0.90 (2) (2) 0.24 0.10 0.14 1.52 0.94 0.76 0.18 0.05 0.18 0.36 100.0 76.0 24.0 3.9 2.0 1.2 0.5 0.2 1.6 0.7 0.3 0.6 6.4 (3) 6.2 (3) (3) 1.7 0.7 1.0 10.4 6.5 5.2 1.2 0.3 1.2 2.5 $27.24 17.94 9.30 1.65 0.86 0.55 0.18 0.06 0.99 0.57 0.09 0.33 2.95 0.04 2.78 0.06 0.07 1.14 0.61 0.53 2.57 1.53 1.23 0.30 0.04 0.21 0.80 100.0 65.8 34.2 6.1 3.1 2.0 0.7 0.2 3.6 2.1 0.3 1.2 10.8 0.1 10.2 0.2 0.3 4.2 2.2 1.9 9.4 5.6 4.5 1.1 0.1 0.8 2.9 $46.38 27.87 18.51 3.26 1.66 0.95 0.47 0.17 1.41 0.89 0.18 0.34 6.14 0.07 5.77 0.18 0.12 4.05 2.92 1.13 3.66 2.31 1.84 0.47 0.04 0.28 1.02 100.0 60.1 39.9 7.0 3.6 2.1 1.0 0.4 3.0 1.9 0.4 0.7 13.2 0.2 12.4 0.4 0.3 8.7 6.3 2.4 7.9 5.0 4.0 1.0 0.1 0.6 2.2 $30.04 21.39 8.65 2.06 1.08 0.63 0.24 0.11 1.00 0.20 0.05 0.75 2.23 0.04 2.11 0.05 0.04 0.97 0.31 0.65 2.39 1.77 1.42 0.35 0.04 0.19 0.39 100.0 71.2 28.8 6.9 3.6 2.1 0.8 0.4 3.3 0.7 0.2 2.5 7.4 0.1 7.0 0.2 0.1 3.2 1.0 2.2 8.0 5.9 4.7 1.2 0.1 0.6 1.3 1 Includes premium pay (such as overtime, weekends, and holidays) for work in addition to the regular work schedule. Cost per hour worked is $0.01 or less. Less than 0.05 percent. 4 Social Security refers to the Old-Age, Survivors, and Disability Insurance (OASDI) program. Note: The sum of individual items may not equal totals due to rounding. 2 3 23 24 Part One Introduction to Employee Benefits now than it was in the 1930s. Since then, medical research and development have led to the ability to diagnose diseases in the early stages, and thus life expectancy of people born in more-recent years has increased notably. These changes make the funding formulas inadequate to meet today’s realities. Second, the federal government’s imposition of wage freezes during World War II gave rise to many present-day discretionary benefits. Employers withdrew costly offerings after the government ended the wage freeze. The withdrawal of these benefits created discontent among employees, because many viewed ­employer-sponsored benefits as an entitlement. For instance, employees strongly reacted to the withdrawal of health-care benefits. Legal battles followed based on unions’ and workers’ claims that employer-sponsored health care is a fundamental right. Health-care benefits subsequently became a mandatory subject of collective bargaining in union settings. Third, the federal government requires companies to support legally required benefits. For example, the Federal Insurance Contributions Act (FICA)21 helps support the Social Security Old-Age, Survivor, and Disability Insurance program (OASDI). Unemployment insurance benefits are financed by federal and, sometimes, state taxes levied on employers. A federal tax is levied on employers under the Federal Unemployment Tax Act (FUTA).22 Both acts are discussed more fully in C ­ hapter 7. Under the Patient Protection and Affordable Care Act of 2010, most employers are required to provide health-care coverage to full-time workers; otherwise, they face stiff monetary penalties. Changing Demographics of the Labor Force According to the Bureau of Labor Statistics, labor force diversity will continue to increase based on gender, age, race, and ethnicity. An employer-sponsored benefits program is most effective when the workforce is relatively similar in terms of needs and preferences. For example, let’s assume that a company’s workforce has 60 percent women and 40 percent men. Most of the women are of child-bearing age and most of the men range in age between their 50s and 60s. On the surface, one could say that this workforce is not very similar in terms of needs and preferences for benefits because its composition varies considerably by gender and age. Below the surface, one could reasonably conclude that there will be substantial differences in the needs and preferences for benefits. Chances are that most of the women may place a high value on day-care benefits, while most of the men will not have a need for such benefits because their children are likely to be near or at adulthood. Employees are more likely to endorse employer-sponsored benefits as long as these benefits fulfill their needs and preferences. Also, employees should believe that contributions to receive benefits are determined fairly. Workforce diversity challenges a company’s quest to establish benefits that satisfy the needs and preferences of workers. For example, the younger segment of the workforce may benefit from family assistance programs and educational assistance programs, while the older segments of the workforce rely on generous health-care benefits and defined benefit plans that support progressive retirement-income streams. Chapter 1 Introducing Employee Benefits 25 Health-care benefits may be redundant for some dual-income families. One spouse or partner will not elect these benefits because he or she already receives coverage as a family member under the other’s plan. As employee needs diversify and desires for benefits become apparent to workforce members, some employees will likely protest benefits that they believe disproportionately suit coworkers. Certainly, differences in employee preferences and needs based on life stage and life circumstances call for flexible benefits offerings, which will be discussed shortly. Internal Environment Internal environmental factors include workforce demographics and collective bargaining agreements. Workforce Demographics The workforce characteristics of companies usually represent the characteristics of the broad labor force. Over time, company workforces have become more demographically diverse as labor force diversity has increased. Not surprisingly, workforce diversity has created challenges for companies in establishing benefits programs. Demographic characteristics to a large extent symbolize employee needs and preferences, which are often associated with life events. Exhibit 1.7 shows typical benefits preferred by employees according to demographic characteristics and probable life events. Should companies presume the needs and preferences of employees? Probably not. Benefits professionals may use surveys once every year or two to collect information about employee demographics, needs, preferences, recent or EXHIBIT 1.7 Likely Preferred Benefits According to Demographics and Life Events Demographics Life Events Benefits Unmarried male and female employees (uncoupled employees) Physical fitness programs Generous vacation allowances Employees with dependent elderly parents or relatives Elder care benefits Flexible work schedules Married male and female employees Flexible work schedules Employees with children, male or female, coupled or uncoupled Day-care assistance Life insurance Health care with dependent coverage Education benefits for children Older workers (nearing retirement) Retirement plans with accelerated benefits accumulation Health-care coverage with prescription drug benefits Generous sick-leave allowances Disability insurance Retiree health-care benefits 26 Part One Introduction to Employee Benefits anticipated life changes, and the extent to which they find particular benefits useful. Statistical analyses will show whether there is an association among these factors. Then, benefits professionals may compare current offerings with survey results. Over time, they can determine whether changes in age, family status, needs, and preferences influence employees’ views of benefits. Collective Bargaining Agreements Collective bargaining agreements specify terms of employment, including pay, benefits, and working conditions. These agreements arise out of negotiations between management and labor unions that represent some or all employees in a company. In Chapter 3, we discuss the National Labor Relations Act of 1935 established that both labor unions and employers possess a duty to bargain with the other party in good faith over terms of employment. Also, this act sets forth mandatory subjects of bargaining in the benefits area, including retirement plans, health care, and paid time off. Over the years, unions have successfully negotiated generous benefits for employees. As shown in Exhibit 1.6, private-sector employers spend more money on benefits for union workers ($18.51 per hour worked) than nonunion workers ($8.65 per hour worked). Key Terms employee benefits, 5 protection programs, 5 paid time off, 5 accommodation and enhancement benefits, 5 total compensation, 5 base pay, 6 cost-of-living adjustments (COLAs), 7 seniority pay, 7 merit pay, 7 incentive pay, 7 person-focused pay, 8 Social Security Act of 1935, 9 Old-Age, Survivor, and Disability Insurance (OASDI), 9 Medicare, 9 state compulsory disability laws (workers’ compensation), 10 workers’ compensation, 10 Family and Medical Leave Act (FMLA), 10 health care, 10 fee-for-service plans, 10 alter­native managed-care plans, 10 point-of-service plans, 10 consumer-driven health care, 10 dental care, 10 vision care, 10 prescription drug plans, 10 mental health and substance abuse plans, 10 life insurance, 11 retirement plans, 11 defined contribution plan, 11 defined benefit plan, 11 paid time-off policies, 11 noncontributory financing, 12 contributory financing, 12 employee-financed benefits, 12 flexible benefits plans, 13 voluntary benefits, 13 welfare practices, 14 strategic planning, 16 competitive strategy, 16 human resource strategies, 17 total compensation strategies, 17 benefits strategies, 17 strategic benefit plans, 17 top-down approach, 18 backing-in approach, 18 Federal Insurance Contributions Act (FICA), 24 Federal Unemployment Tax Act (FUTA), 24 Patient Protection and Affordable Care Act of 2010, 24 collective bargaining agreements, 26 Chapter 1 Discussion Questions Cases Introducing Employee Benefits 27 1. Describe how employee benefits fit into the total compensation function. 2. Offer some suggestions for how companies might lessen the entitlement mentality among employees toward employee benefits. 3. Companies possess limited budgets to fund employee benefits. From an employee’s perspective, which employee-benefits practices should be funded? Which are easily dispensable? Now respond to these questions as a company representative. Explain your answers. 4. Describe the differences between strategic benefits plans and benefits practices. Should strategic benefits plans be developed before setting benefits practices? Explain your answer. 5. Consider the varieties of internal and external information that companies consider when planning a benefits program. Which piece of information do you believe is most important to this planning process? Least important? Explain your answers. 1. Understanding Your Employee Benefits: Understanding a Job Offer As a recent college graduate, you are excited to start the search for your first career position. You have already started interviewing for opportunities as a management trainee. You have been fortunate to have two interviews so far, and you identified several other companies to apply to at a recent job fair. From what you have learned, it seems that the starting salary for a job as a management trainee in your area is about the same at all companies. Therefore, you know that salary isn’t going to differentiate one job offer from another. It will, of course, be important to understand the work environment and future career opportunities at a given company as you compare offers. As you think back to some of the career-search seminars you’ve attended, you remember that you should also compare benefit offerings. As you look through the Web sites of the companies you have applied to, you quickly see that there are lots of different benefits plans offered. In fact, as you look at this information, you start to become concerned that comparing benefits is going to be a challenge. You think that you need to have a better understanding of the value of different benefits when you consider the total compensation you would receive from a company. You decide to start by more closely looking at the benefits offered by your current best prospect, which is a position at a large established corporation where you interviewed last week. You pull up the careers page on the company Web site and find a chart that lists the benefits offered. Old age, survivor, and disability insurance Medicare Unemployment insurance Workers’ compensation Family and medical leave Health care Dental insurance Employee assistance program Tuition reimbursement Defined contribution retirement plan Vacation days Holidays Sick days As you review the chart, you aren’t sure what you should pay attention to and what will make a difference in evaluating an offer. You think about lists that you’ve read on other company’s Web sites and think that other companies seem to offer benefits plans very similar to this one. At this point, you think that maybe benefit offerings don’t really 28 Part One Introduction to Employee Benefits make a difference. You decide you need to learn more before you go much further in the interview process. If the benefits information provided to you is unclear, you know you should be prepared to ask questions. The future is exciting, but you know that once you receive an offer, it is an important decision that you should make with full information. 1. If two different companies list the same benefits offerings, should you assume that the value of the benefits are the same? 2. What are some benefits offered from this company that you should find more information about in order to fully understand a job offer from the company? Why? 3. Why don’t all companies just offer the same benefits? 2. Managing Employee Benefits: Strategic Benefits Planning at Makers Craft Makers Crafts is facing strong competition in the retail craft chain-store market. Easy Crafts, a new discount craft-store chain, is opening stores in many of Makers Crafts’ market areas. Makers Crafts has been a leader in the craft supply marketplace due to the company’s superior customer service provided by a well-trained and compensated retail staff that are experts in crafts. Customers have enjoyed the opportunity to gain advice and ideas from the company’s talented workers over the years, and customers are loyal to the committed staff. However, the new discount chain is drawing away customers by recruiting the experienced staff from Makers Crafts. Adding experienced staff to the lower prices at Easy Crafts is quickly drawing business away from Makers Crafts, and company executives are concerned. The sudden employee attrition at Makers Crafts is a top priority for new Director of Human Resources Latonya Thomas. Her initial evaluation of the situation suggests that the company needs to examine its benefit offerings. Makers Crafts has done well at recruiting and training staff; however, little attention has been paid to the company benefits offerings to complement the competitive employee pay. While the company pays its employees above market-average wages, it has slowly changed benefits offerings in response to cost concerns. In the last five years, employee contributions to health-care premiums have increased, and the company has scaled back its contribution to the employee retirement plan. While these changes have helped the company control benefit costs, the changes have led to frustration by the employees. Easy Crafts has capitalized on employee dissatisfaction at Makers Crafts by offering a generous benefits package to draw away workers. The frustrated employees that have moved to Easy Crafts have accepted minor pay cuts in exchange for benefits that better meet their needs. For example, many of the company workers are older, and their concerns about retirement benefits in particular are more pronounced as they know retirement is not far away. Part of Easy Crafts’ strategic planning process to grow its market share included determining the types of benefits that would be attractive to these workers. Thus, Easy Crafts offers a retirement plan that provides more significant contributions by the company than Makers Crafts’ plan provides. Given the successful recruitment of so many Makers Crafts workers, it seems that Easy Crafts’ planning was effective. Latonya knows that the company needs to make some changes to its benefits plan. However, she also knows that it is important to not make any hasty decisions in response to this challenge. Latonya needs to begin collecting information in order to start the planning needed to determine appropriate changes to Makers Crafts’ benefits plan. 1. What kind of strategic planning approach is Latonya taking for Makers Crafts? Is this an effective approach? 2. What kind of information does Latonya need for the strategic benefits planning process for Makers Crafts? Chapter 1 Endnotes Introducing Employee Benefits 29 1. U.S. Department of Labor, “Union Members—2015,” USDL 16-0158. Accessed ­February 19, 2016, www.bls.gov. 2. WorldatWork. “WorldatWork Salary Budget Survey, Top-Level Results.” 2016. Accessed October 19, 2016, www.worldatwork.org. 3. A. Mitra, N. Gupta, and J. D. Shaw, “A Comparative Examination of Traditional and Skill-Based Pay Plans,” 4 Journal of Managerial Psychology, 2011: 278–296. 4. International Foundation of Employee Benefit Plans, “Corporate Benefits Departments: Staffing and Operations: 2015 Survey Results.” Accessed March 1, 2016, www.ifebp.org. 5. U.S. Bureau of Labor Statistics, Occupational Outlook Handbook, 2016–17 Edition, Compensation and Benefits Managers, 2015. Accessed February 15, 2016, www.bls.gov/ooh/ management/compensation-and-benefits-managers.htm. 6. U.S. Bureau of Labor Statistics, Employment Projections—2014–24 (USDL-15-2327), 2015. 7. U.S. Bureau of Labor Statistics, 2014 wage data. Accessed February 15, 2016, www. bls.gov/oes. 8. F. R. Dulles and M. Dubofsky, Labor in America: A History. Arlington Heights, IL: Harlan Davidson, 1993. 9. U.S. Bureau of Labor Statistics, Welfare Work for Employees in Industrial Establishments in the United States. Bulletin No. 250 (1919): 119–123. 10. U.S. Department of Labor, Employee Benefits in the United States, March 2015. Bulletin No. 15-1432. Washington, DC: Government Printing Office, July 24, 2015. 11. F. R. Dulles and M. Dubofsky, Labor in America: A History, 6th ed. Arlington Heights, IL: Harlan Davidson, 1999. 12. J. Kwon and P. Hein, “Employee Benefits in a Total Rewards Framework,” Benefits Quarterly, first quarter, 2013: 32–38. 13. Bristol-Myers Squibb, Statement on Workforce Diversity. Accessed March 10, 2016, www.bms.com/ourcompany/diversity/Pages/default.aspx. 14. ExxonMobil, “Our Guiding Principles,” Accessed March 3, 2016, http://corporate.­ exxonmobil.com/en/company/about-us/guiding-principles. 15. Eli Lilly’s Annual Report, 2015. Accessed February 20, 2016, http://investor.lilly.com/ annuals.cfm. 16. Why Lilly? Accessed March 17, 2016, https://careers.lilly.com/why-lilly. 17. V. S. Barocas, Strategic Benefit Planning: Managing Benefits in a Changing Business Environment. Report No. 1012. New York: The Conference Board, 1992. 18. ExxonMobil, description of some ExxonMobil benefits practices offered in the United States. Accessed March 17, 2016, www.exxonmobil.com. 19. Barocas, Strategic Benefit Planning. 20. U.S. Department of Labor, “Employer Costs for Employee Compensation—September 2015,” USDL 15-2329. Accessed February 15, 2016, www.bls.gov. 21. 26 U.S.C. §§3101–3125. 22. I.R.C. §3121(d); Treas. Reg. §§31.3121(d)-1, 31.3121(d)-2. This page intentionally left blank Chapter Two The Psychology and Economics of Employee Benefits* Chapter Outline The Psychology of Employee Benefits Employment Relationship as Social Exchange How Employee Benefits Constitute Social Exchange Workforce Changes and the Employment Relationship Psychological Contracts Psychological Contract Development Psychological Contract Violation Employee Benefits as Constituting Psychological Contracts Employee Attitudes and Employee Benefits Justice and Perceptions of Organizational Support Organizational Citizenship Behaviors The Economics of Employee Benefits: Why Do Employers Offer Benefits? Cost Advantage Recruiting Certain Types of Workers Tax Incentives Who Pays for Benefits? Summary Key Terms Discussion Questions Cases 1. Understanding Your Employee Benefits: Forgoing a Benefits Package 2. Managing Employee Benefits: Cutting Benefits at Generals Construction Endnotes Learning Objectives In this chapter you will gain an ­understanding of: 1. The employment relationship as an exchange relationship and the ­psychology behind why firms provide employee benefits. *The material in this chapter pertaining to the psychology of employee benefits was prepared by Professor Niti Pandey, Department of Business Administration, Eastern Connecticut State University, and edited for this edition by Joseph Martocchio. The material in this chapter pertaining to the economics of employee benefits was prepared by Professor Darren Lubotsky, Department of Economics and the Institute for Government and Public Affairs, University of Illinois at Chicago, and edited for this edition by Joseph Martocchio. 31 32 Part One Introduction to Employee Benefits 2. Employee benefits as part of the psychological contract and how some employee expectations about benefits might be formed. 3. How employee perceptions of justice or fairness are important to ­ nderstanding how pay and benefits u practices influence employee attitudes. 4. The economic rationales for why companies offer employee benefits. 5. Who pays for employee benefits. The purpose of this chapter is twofold. First, it is important to learn about the psychological basis of employee benefits. Employers can use this knowledge to understand how employee benefits influence the attitudes and performance of their employees. Also, employers can then develop and maintain effective benefits programs aimed at promoting worker satisfaction, commitment, and productivity. Second, it is important to understand the economic basis of employee benefits. Employee benefits are a costly proposition. Even though employee benefits are expensive, most employers continue to offer them. Still, it begs the question pertaining to whether companies