CHAPTER 10
INDIRECT FINANCIAL COMPENSATION (EMPLOYEE BENEFITS)
CHAPTER OBJECTIVES
10.1 Define indirect financial compensation (employee benefits)
10.2 Describe legally required benefits and the various kinds
10.3 Define discretionary benefits and explain the various types
10.4 Explain workplace flexibility (work-life balance)
10.5 Describe customized benefits plans
10.6 Summarize the issues of communicating information about benefits plans
KEY TERMS
Indirect financial compensation (employee benefits): All financial rewards not
included in direct financial compensation.
Unemployment insurance: Provides workers whose jobs have been terminated through
Out-of-pocket expenses: The maximum amount an employee pays for health care during
a calendar or plan year.
Coinsurance: The percentage of covered expenses paid by the insured. Most fee-for-
service plans stipulate 20 percent coinsurance. This means that the insured will pay 20
percent of covered expenses, whereas the insurance company pays the remaining 80
Primary care physician: Designated by HMOs to determine whether patients require the
care of a medical specialist. This functions to control costs by reducing the number of
medically unnecessary visits to expensive specialists.
Consumer-driven health care: Refers to the objective of helping companies maintain
control over costs while also enabling employees to make greater choices about health
employers to favorable tax treatment by deducting the contributions from taxable income.
Qualified plans do not disproportionately favor highly compensated employees.
Nonqualified plan: Welfare and pension plans that do not meet various requirements set
forth by the Employee Retirement Income Security Act of 1974 (ERISA), disallowing
favorable tax treatment for employee and employer contributions.
401(k) plan: Defined contribution plan in which employees may defer income up to a
maximum amount allowed.
Matching contribution:
Cash balance plan: Retirement plan with elements of both defined benefit plans and
defined contribution plans.
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Volunteerism: Time to support a meaningful cause.
Relocation benefits: Company-paid shipments of household goods and temporary living
expenses, covering all or a portion of the real estate costs associated with buying a new
home and selling the previously occupied home.
Relocation benefits: Company-paid shipment of household goods and temporary living
numerous benefits.
LECTURE OUTLINE
INDIRECT FINANCIAL COMPENSATION (EMPLOYEE BENEFITS)
All financial rewards that are not included in direct financial compensation.
LEGALLY REQUIRED BENEFITS
Legally required benefits include social security, unemployment compensation, and
workers’ compensation.
DISCRETIONARY BENEFITS
Benefit payments made as a result of unilateral management decisions in nonunion firms
and from labor-management negotiations in unionized firms.
HEALTH CARE
Benefits for health care represent the most expensive item in the area of indirect financial
compensation.
● FEE-FOR-SERVICE PLANS — Insurance protection for three types of medical
expenses: hospital expenses, surgical expenses, and physician’s charges.
● CONSUMER-DRIVEN HEALTH CARE PLANS—Companies are
increasingly placing the responsibility for health care coverage on employees.
System where companies give each employee a set amount of money annually
with which to purchase health care coverage.
▪ Health Savings Account (HSA): Tax-free health spending and savings
accounts available to individuals and families who have qualified high-
deductible health insurance policies as determined by IRS regulation.
LEGISLATION PERTAINING TO HEALTH CARE
● EMPLOYEE RETIREMENT INCOME SECURITY ACT—Passed to
strengthen existing and future retirement programs.
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otherwise lose because of termination, layoff, or other change in employment
status.
● OLDER WORKERS BENEFIT PROTECTION ACT—Amendment to the
Age Discrimination in Employment Act, prohibits discrimination in the
administration of benefits on the basis of age, but also permits early retirement
incentive plans as long as they are voluntary.
● HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT—
Provides protection for approximately 25 million Americans who move from one
job to another, who are self-employed, or who have pre-existing medical
conditions.
● FAMILY AND MEDICAL LEAVE ACT—Provides for up to 12 workweeks of
unpaid leave per year for absences due to the employee’s own serious health
condition, or the need to care for a newborn or newly-adopted child or a seriously
ill child, parent, or spouse.
DISCRETIONARY BENEFITS
Discretionary benefits fall into three broad categories: protection programs, paid time off,
and services. Protection programs provide family benefits, promote health, and guard
against income loss caused by such catastrophic factors as unemployment, disability, or
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● DEFINED CONTRIBUTION PLANS—Retirement plan that requires specific
contributions by an employer to a retirement or savings fund established for the
employee. A 401(k) plan is a defined contribution plan in which employees may
defer income up to a maximum amount allowed.
● CASH BALANCE PLANS—Retirement plan with elements of both defined
benefit plans and defined contribution plans.
● LEGISLATION PERTAINING TO RETIREMENT PLANS—Two important
time away from the job for many purposes.
● VACATION—Paid vacations provide workers with an opportunity to rest,
become rejuvenated, and hopefully, become more productive.
● SICK PAY AND PAID TIME-OFF BANKS—Each year many firms allocate,
to each employee, a certain number of days of sick leave, which they can use
time off to contribute to causes of their choice.
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● OTHER TYPES OF PAID TIME OFF—While paid vacations and sick pay
comprise the largest portion of payment for time not worked, there are numerous
other types that companies use.
employee recruitment and retention.
● RELOCATION—Company-paid shipments of household goods and temporary
living expenses, covering all or a portion of the real estate costs associated with
buying a new home and selling the previously occupied home.
● DOMESTIC PARTNER BENEFITS AND SAME-SEX MARRIAGE—A
For employers, creating a work-life balanced environment can be a key strategic factor in
attracting and retaining the most talented employees. By providing such an environment,
employees are better able to fit family, community, and social commitments into their
schedules, and they appreciate that.
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● FLEXTIME—Practice of permitting employees to choose their own working
hours, within certain limitations.
● COMPRESSED WORKWEEK—Arrangement of work hours that permit
employees to fulfill their work obligation in fewer days than the typical five-day
workweek.
● JOB SHARING—Two part-time people split the duties of one job in some
agreed-on manner and are paid according to their contributions.
● TWO-IN-A-BOX—Some companies are giving two executives the same
responsibilities and the same title and letting them decide how the work is to be
divided (Two-in-a-Box). Unlike job sharing, it is a full-time job for both
executives.
● TELECOMMUTING—Work arrangement whereby employees, called
teleworkers or telecommuters, are able to remain at home (or otherwise away
from the office) and perform their work using computers and other electronic
devices that connect them with their offices.
10-1. Define indirect financial compensation (employee benefits).
10-2. What are the mandated or legally required benefits? Briefly describe each.
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Social security: Social Security Act of 1935 created a system that provided retirement
benefits only. Subsequent amendments to the act added other forms of protection such as
disability insurance, survivors’ benefits, and, most recently, Medicare.
Unemployment compensation: If an individual is laid off by an organization covered by
the Social Security Act, he or she may receive unemployment compensation for up to 26
weeks.
Workers’ compensation: Provides a degree of financial protection for employees who
incur expenses resulting from job-related accidents or illnesses.
10-3. What are the basic categories of discretionary benefits? Describe each.
10-4. What items are included in the discretionary benefit of paid time off category?
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number of companies are providing paid time off (PTO), a certain number of days off
provided each year that employees can use for any purpose.
Sabbaticals: Temporary leaves of absence from an organization, usually at reduced pay.
Other Types of Paid Time Off: It is common for organizations to provide payments to
assist employees in performing civic duties. Some companies routinely permit employees
to take off during work hours to handle personal affairs without taking vacation time.
When a worker is called for jury duty, some organizations continue to pay their salary;
others pay the difference between jury pay and their salary. When the National Guard or
military reserve is called to duty, some companies pay their employees a portion of their
salary while on active duty. Further, during an election, many companies permit
employees voting time. Still other firms permit bereavement time for the death of a close
relative. Finally, there is the payment for time not worked while at the company such as
rest periods, coffee breaks, lunch periods, cleanup time, and travel time.
10-5. Define each of the following:
a. fee-for-service plan
b. Health maintenance organization (HMO)
c. Consumer-driven health care plans
10-6. There are numerous forms of retirement plans. Describe each of the following:
a. Defined benefit plan
b. Defined contribution plan
c. 401(k) plan
d. Cash balance plan
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a. Defined benefit plan: Retirement plan that provides the participant with a fixed
benefit upon retirement.
b. Defined contribution plan: Retirement plan that requires specific contributions
by an employer to a retirement or savings fund established for the employee.
c. 401(k) plan: Defined contribution plan in which employees may defer income up
to a maximum amount allowed.
d. Cash balance plan: Retirement plan with elements of both defined benefit plans
and defined contribution plans.
10-7. Define each of the following benefit laws:
a. Employee Retirement Income Security Act
b. Consolidated Omnibus Budget Reconciliation Act
c. Health Insurance Portability and Accountability Act
c. Health Insurance Portability and Accountability Act: Provides protection
for Americans who move from one job to another, who are self-employed, or
who have preexisting medical conditions.
d. Family and Medical Leave Act: Provides employees up to 12 weeks a year
of unpaid leave in specified situations.
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f. Pension Protection Act: Seeks to ensure that employers make greater
contributions to their pension funds, ensuring their solvency, and avoiding a
potential multibillion-dollar taxpayer bailout of the Pension Benefit Guaranty
Corporation.
g. Patient Protection and Affordable Care Act: Some of the major features of
the bill are: 1) Individuals must purchase health insurance or risk being fined;
2) children can stay on their parents’ policy until age 26; 3) insurance
companies cannot cancel a policy if the insured gets sick; 4) a person cannot
be denied insurance simply because they have a pre-existing health condition;
5) there is no maximum limit on insurance coverage; and 6) there is no
waiting time with regard to coverage if a person has a pre-existing condition.
10-8. What are topics included within employee services?
10-9. What is the purpose of a customized benefit plan?
10-10. What is the relationship between smoke-free workplaces and the Patient
Protection and Affordable Care Act?
10-11. Define each the following workplace flexibility factors:
a. Flextime
b. Compressed workweek
c. Job sharing
d. Telecommuting
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b. Compressed workweek: Arrangement of work hours that permits employees
to fulfill their work obligation in fewer days than the typical five-day
workweek.
c. Job sharing: Two part-time people split the duties of one job in some agreed-
on manner and are paid according to their contributions.
d. Telecommuting: Work arrangement whereby employees, called teleworkers
or telecommuters, are able to remain at home (or otherwise away from the
office) and perform their work using computers and other electronic devices
that connect them with their offices.
10-12. What is the purpose of the staffing practice called Two-in-a-Box?
DISCUSSION OF CHAPTER 10 INCIDENTS
HRM Incident 1: Flextime
When the directive came down allowing Kathy to place her office on flextime, she
spelled out the rules carefully to her people. Each person was to work during the core
period from 10:00 A.M. to 2:30 P.M.; however, they could work the rest of the eight-hour
day at any time between 6:00 A.M. and 6:00 P.M. Kathy felt her workers were honest
and well-motivated, so she did not bother to set up any system of control.
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QUESTIONS
10-20. What are the advantages and disadvantages of flextime?
10-21. What could Kathy have done to keep the above situation from occurring?
10-22. Are there other workplace flexibility arrangements that Kathy might use to
improve morale?
HRM Incident 2: Communicating Benefits at Seaview Property Management
Company
With several changes in the company’s health insurance options, Monique Solara knew
that benefits open enrollment this year would be challenging. As the Manager of
Employee Benefits at Seaview Property, Monique is responsible for administering
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Seaview’s benefits program. The company recently announced changes to health
insurance options as well as a reduction in the company’s 401(k) matching contributions.
Monique immediately received calls from several confused or angry employees. Because
of the changes, some employees may need to change health care providers, which will be
costlier to them. Other employees have concerns about their retirement benefits,
particularly how much lower matching contributions will be.
Prior to the recent changes, Monique thought the company’s benefits communication was
sufficient. New employees receive an informational packet that details the features of
each benefit. There is extensive information about each health insurance option including
lists of healthcare providers and an outline of specific coverage for common medical
procedures. Then, during open enrollment each year, employees receive an updated
packet of information listing any changes in the health insurance plans.
QUESTIONS
10-23. Why is it important to provide effective communication about employee benefits?
Explain.
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10-24. What is your opinion of Seaview’s current benefits communication practices?
Explain.
10-25. How can Seaview improve their benefits communication? Discuss.