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IV. Components of a Benefit Plan
Exhibit 12.5 outlines a model of the factors influencing benefit choice, from
both the employer’s and the employee’s perspective.
A. Employer Factors
As Exhibit 12.5 indicates, a number of factors affect employer
preference in determining desirable components of a benefit package.
Relationship to Total Compensation Costs
oA good compensation manager considers employee benefit costs as part
of a total package of compensation costs.
oA good compensation manager thinks whether there is a better use for the
money. Benefit costs are only one part of a total compensation package.
Decisions about outlays have to be considered from this perspective.
Costs Relative to Benefits
oToo frequently the costs/advantages of a particular benefit inclusion are
viewed in isolation, without reference to total package costs or forecasts
of rising costs in future years.
oTo control spiraling benefit costs, administrators should adopt a broader,
cost-centered approach.
oAs a first step, this approach would require policy decisions on the level
of benefit expenditures acceptable both in the short and the long runs.
Historically, benefit managers negotiated or provided benefits
on a package basis rather than a cost basis.
oA cost-centered approach would require that benefit administrators, in
cooperation with insurance carriers and armed with published forecasts of
anticipated costs for particular benefits, determine the cost commitments
for the existing benefit package.
Budget dollars not already earmarked may then be allocated to
new benefits that best satisfy organizational goals.
Factors affecting this decision include an evaluation of benefits
offered by other firms and the competitiveness of the existing package
Also important is compliance with various legal requirements as
they change over time
Finally, the actual benefit of a new option must be explored in
relation to employee preferences.
oIf a benefit forecast suggests future cost containment may be difficult, the
benefit should be offered to employees only on a cost-sharing basis.
Management determines what percentage of cost it can afford to
bear within budget projections, and the option is offered to employees
on a cost-sharing basis, with projected increases in both employer and
employee costs communicated openly.
Competitor Offerings
oBenefits must be externally equitable, too.
oA policy decision must be made about the position (market lead, market
lag, or competitive) the organization wants to maintain in its absolute
level of benefits relative to the competition.
oOne of the best strategies for determining external equity is to conduct a
benefit survey. Alternatively, many consulting organizations, professional
associations, and interest groups collect benefit data that can be
purchased.
Role of Benefits in Attraction, Retention, and Motivation
oGiven the rapid growth in benefits and the staggering cost implications, it
seems only logical that employers would expect to derive a fair return on
this investment. In fact, there is at best only anecdotal evidence that
employee benefits are cost-justified. This evidence falls into three
categories.
oFirst, employee benefits are widely claimed to help in the retention of
workers. Benefit schedules are specifically designed to favor longer-term
employees.
For example, retirement benefits increase with years of service,
and most plans do not provide for full employee eligibility until a
specified number of years of service have been reached. Equally, the
amount of vacation time increases with years of service, and
employees’ savings plans, profit-sharing plans, and stock purchase
plans frequently provide for increased participation or benefits as
seniority increases. By tying these benefits to seniority, it is assumed
that workers are more reluctant to change jobs.
There is some research to support the common assumption that
benefits increase retention. Two studies found that higher benefits
reduced mobility. More detailed follow-up studies, though, found that
only two specific benefits curtailed employee turnover: pensions and
medical coverage.
oIt has been assumed that turnover is bad and stability is good. In fact,
there are times when turnover may be good—something employers may
not want to discourage.
oEmployee benefits also might be valued if it could be proved that they
increase employee satisfaction. Benefits also would be valuable if we
could show a link to increased productivity.
Unfortunately, no strong data exist linking benefits level and
employee productivity. Perhaps as a result, companies are cutting
benefits, especially medical insurance, as a cost reduction strategy.
If we want to argue that benefits matter, first we need to show
that benefits are well-designed—in part this means they must meet
employee needs.
Critics argue that benefits administrators haven’t responded to
long term changes in the workforce.
Ever-increasing numbers of women in the labor force, coupled
with increasing numbers of dual-career families and higher
educational attainments, suggest changing values of employees.
Changing values, in turn necessitate a reevaluation of benefit
packages.
One response to these workforce changes is increased interest in
so-called work/life balance benefits. Things like day care, elder care,
on-site fitness centers, and weight-loss programs foster a perception
that the company cares about its employees.
Legal Requirements
oEmployers want a benefit package that complies with all aspects of the
law.
oExhibit 12.6 shows part of the increasingly complex web of legislation in
the benefit area.
oThe three legally mandated benefits include workers’ compensation,
social security, and unemployment insurance.
Absolute and Relative Compensation Costs
oAny evaluation of employee benefits must be placed in the context of
total compensation costs.
oCost competitiveness means the total package must be competitive—not
just specific segments.
oConsequently, decisions on whether to adopt certain options must be
considered in light of the impact on total costs and in relationship to
expenditures of competitors.
B. Employee Factors
Employee preferences for various benefit options are determined by
individual needs. The benefits perceived to best satisfy individual needs are
the most highly desired. These needs arise out of feelings of perceived equity
or inequity.
Equity
oThe perceived unfairness of difference need not be rational, but, it is
nevertheless, a factor that must be considered in determining employee
needs.
oOccasionally this comparison process leads to a “bandwagon” effect, in
which new benefits offered by a competitor are adopted without careful
consideration, simply because the employer wants to avoid hard feelings.
oThis phenomenon is particularly apparent for employers with strong
commitments to maintaining a totally or partially nonunion work force.
oWhile the effectiveness of this strategy in thwarting unionization efforts
has not been demonstrated, many nonunion firms would prefer to provide
the benefit as a safety measure.
Personal Needs of Employees
oOne way to gauge employee preferences is to look at demographic
differences. The demographic approach assumes that demographic groups
(e.g., young versus old, married versus unmarried) can be identified for
which benefit preferences are fairly consistent across members of the
group. There is some evidence that these assumptions are only partially
correct. In an extensive review of employee preference literature, Glueck
traced patterns of group preferences for particular benefits.
Older workers show stronger preferences than younger workers
for pension plans.
Families with dependents had stronger preferences for
health/medical coverage than families with no dependents.
The big surprise in many of the studies, though, is that many of
the other demographic group breakdowns fail to result in differential
benefit preferences.
Traditionally, it has been assumed that benefit preferences ought
to differ among males versus females, blue collar versus white collar,
and married versus single. Few of these expectations have been borne
out by the studies.
Studies have tended to be more valuable in showing preference
trends that are characteristic of all employees.
Among the benefits available, health/medical and stock plans
are highly preferred benefits, while such options as early retirement,
profit sharing, shorter hours, and counseling services rank among the
least-preferred options.
Beyond these conclusions, most preference studies have shown
wide variation in individuals with respect to desired benefits.
oThe weakness of the demographic approach has led some organizations to
undertake a second and more expensive empirical method of determining
employee preferences: surveying individuals about needs.
oOne way of accomplishing this requires development of a questionnaire
on which employees evaluate various benefits. Exhibit 12.7 illustrates a
questionnaire format.
oA third empirical method to identify employee preferences is commonly
known as a flexible benefit plan (also called a section 125 plan after the
section of the Tax Code or a cafeteria-style plan).
Employees are allotted a fixed amount of money and permitted
to spend that amount in the purchase of benefit options.
From a theoretical perspective, this approach to benefit
packaging is ideal. Employees directly identify the benefits of greatest
value to them, and by constraining the dollars employees have to
spend, benefit managers are able to control benefit costs.
V. Administering the Benefit Program
Administrative time is spent on three functions requiring further discussion:
oCommunicating about the benefits program
oClaims processing
oCost containment
A. Employee Benefit Communication
Benefits communications revolves around four issues: what is
communicated, to whom, how it’s communicated, and how frequently.
Much of the effort to achieve benefit goals today focuses on identifying
methods (how) of communication.
The most frequent method for communicating employee benefits today
is probably still the employee benefit handbook.
oA typical handbook contains a description of all benefits, including levels
of coverage and eligibility requirements.
To be most effective, the benefit manual should be accompanied by
repetition of the message in multiple media: newsletters, e-mails, direct
mailings, voice mail blasts, and social media.
An effective communications package should match the message with
the appropriate medium.
Technological advances have made tremendous improvements in
employee benefit communication.
oThe internet has become a major communication tool for benefits and is
growing at a rapid pace.
One report suggests that perhaps as many as 80 percent of the
Fortune 1000 companies will utilize at least some form of
Internet-based employee benefit application.
A wide range of applications will be offered, from online benefit
information to annual benefit enrollment processing, personal data
changes, 401(k) changes, and complete employee self-service.
oCompanies also use intranets. An intranet is an internal organizational
online Web through which all forms of communication within the
organization can be streamlined. Advantages of an intranet include:
Employee access to benefit information 24/7 without added cost
Employee’s ability to directly post changes to their accounts
without completing lengthy paperwork
Increased ease of updating information
oEmployers are increasingly posting their employee benefit handbook
components on their intranets. This change is beneficial to employers
because of the decreased cost and increased ease of making revisions in
the employee benefit handbook components.
Experts say ‘e-benefits’ are a huge trend waiting to reinvent
human resource practices.
Despite these and other innovative plans to communicate employee
benefit packages, failure to understand benefit components and their value is
still one of the root causes of employee dissatisfaction with a benefit package.
oAn organization must spell out its benefit objectives and ensure that any
communications achieve these objectives. Exhibit 12.9 shows that
employees who think company communications about benefits are
effective are in turn more satisfied with those same benefits.
B. Claims Processing
Claims processing arises when an employee asserts that a specific
event (e.g., disability, hospitalization, and unemployment) has occurred and
demands that the employer fulfill a promise of payment.
As such, a claims processor must first determine whether the act has, in
fact, occurred.
oIf the event did occur, the second step involves determining if the
employee is eligible for the benefit.
oIf the payment is not denied at this stage, the claims processor calculates
the payment level.
oIt is particularly important at this stage to ensure coordination of benefits.
If multiple insurance companies are liable for payment, a good claims
processor can save from 10 to 15 percent of a claim’s cost by ensuring
that the liability is jointly paid.
C. Cost Containment
Increasingly, employers are auditing their benefit options for cost
containment opportunities. The most prevalent practices include:
oProbationary periods—excluding new employees from benefit coverage
until some term of employment (e.g., three months) is completed.
oBenefit limitations—it is not uncommon to limit disability income
payments to some maximum percentage of income and to limit
medical/dental coverage for specific procedures to a certain fixed amount.
oCopay—requiring that employees pay a fixed or percentage amount for
coverage.
oAdministrative cost containment—controlling costs through policies
such as seeking competitive bids for program delivery.
oDeny Service – for pre-existing conditions.
oNegotiate lower fees by providers.
oDevelop programs that encourage wellness.
oOutsource benefits and administration.
oSelf insure.
oProvide accommodations for employees to return to work after illness or
disability.
oExhibit 12.10 provides definitions of some common cost containment
terms.
Probably the biggest cost containment strategy is the movement to
outsourcing. By hiring vendors to administer their benefit programs, many
companies claim greater centralization, consistency, and control of costs and
benefits.
