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VI. Your Turn: World Measurement
Summary of Case
with the cost of employee benefits. While he is ready to offer a competitive wage increase
(maximum of 3%), he wants the total compensation package to cost 3% less. Data is provided
Learning Objective
Understand the value of cost ramifications associated with different types of employee
benefits.
Teaching Guideline
Use this case to help students practice the concepts learned until now to design a
compensation benefit plan.
Discussion of Case Questions
1. Cost out these packages given the data in Exhibits 1 and the information obtained
from various insurance carriers and other information sources (Exhibit 4).
Exhibit 1: Current compensation costs
Average yearly wage $26,769
1. Legally required payments (employer’s share
only)
$2,141.00
a. Old age, survivors, disability, and health insurance
(FICA) taxes
$1,509.00
b. Unemployment compensation $292.00
and cash sickness insurance, state sickness
2. Pension, insurance, and other agreed-upon
payments (employer’s share only)
$3,129.00
a. Pension plan premiums and pension payments not
$1,460.00
g. Employee meals furnished by company $0
h. Miscellaneous payments (compensation payments
in excess of legal requirements, separation or
termination pay allowances, moving expenses,
etc.)
$24.00
3. Paid rest periods, lunch periods, wash-up time,
travel time, clothes-change time, get-ready time,
etc. (60 minutes)
$727.00
4. Payments for time not worked $2,769.00
d. Payments for state or national guard duty; jury,
$66.00
5. Other items $157.00
etc.)
e. Special wage payments ordered by courts,
payments to union stewards, etc.
$46.00
TOTAL $8,923.00
Exhibit 2: Benefit Preferences
Benefit Type or
Method of
Administering
Importance
to Workers
Benefit Type or
Method of
Administering
Importance
to Workers
plans
Short-term disability 69 Discount on goods 5
Refer to Exhibit 3: Two Possible Packages for Cutting Benefits Costs
Refer to Exhibit 4: Analysis of Cost Implications for Different Cost-Cutting
Strategies: World Measurement
Cost Savings Calculation:
Under Option 1:
The following table shows the cost implications of the new plan - Option 1 on the cost
structure.
Benefit Cost Savings
Dollar – on –dollar savings equal to copay
amount
Pension $ 300
Savings as Percent of Benefit- Type Cost
Life insurance premiums, death benefits,
$ 142.7
Eliminating the 10-minute paid break does not affect the cost structure since employees
leave 10 minutes early.
Total cost savings under Option 1 is $ 1,202.46Under Option 2:
The following table shows the cost implications of the new plan - Option 2 on the cost
structure.
Benefit Cost Savings
Dollar – on –dollar savings equal to copay amount
company by employees (=10% of $27)
Employee meals furnished by company (=15% of $0) $ 0
Contributions to employee thrift plans (=10% of $71) $ 7.1
Total cost savings under Option 2 $ 543
2. Which package should you recommend to Jacobs? Why?
Based on Mr. Jacob’s objectives—maximum 3 percent wage increase and a compensation
3. Which of the strategies do you think will require less input from employees in terms
of their reactions?
Option 2 will definitely require less employee input than option 1. While option 1 offers
affected by the elimination of a 10-minute break (since they get to leave work 10 minutes
earlier) and the coordination of social security with their pension plan.
employees with less than one year of service is unknown, it will be assumed the majority
Answers to Review Questions
1. Early in this chapter, we identified reasons for the historical growth in the size of
benefits packages. Which of these reasons still affect the growth of employee benefits
today? Which actually might be current reasons for declines in the size of benefit
packages?
data about payoffs has forced benefits to become a costly affair for the companies. Also,
with governmental legislations changing almost rapidly, there could always be a scanner
2. Erinn Kelly, VP of Human Resources at Lawson Chemical, just purchased a local
salary survey that has employee benefits data. She was shocked to see that Lawson
has a larger benefits bill (38 percent of payroll) than the average in the community
(31 percent). In a memo to you, she demands an explanation for why our package is
significantly bigger. What sound reasons might save you from getting fired?
Employees expect benefits and a competitive benefit package can help an organization
employee needs to make sure a match exists with the types of benefits offered. The
company also must evaluate its communication methods to ensure that employees
understand their benefits, know their financial value, and know how to make legitimate
3. You are the benefits manager in a firm metaphorically described as part of the rust
belt, in Syracuse, NY. The average age of your 600-person workforce is 43.
Eighty-eight percent of your workforce is male, and there is hardly any turnover.
Not much is happening on the job front. How do these facts influence your decisions
about designing an employee benefit program?
The external market definitely influences decisions about designing an employee benefit
program. Syracuse is a declining market where labor supply exceeds demand, i.e. low
The second part of the question asks about benefits for an older workforce. Evidence
by reductions elsewhere.
4. As HR director at Crangle Fixtures, your bonus this year is based on your ability to
cut employee benefit costs. Your boss has said that it’s okay to shift some of the costs
over to employees (right now they pay nothing for their benefits) but that he doesn’t
want you to overdo it. In other words, at least one-half of your suggestions should
not hurt the employee’s pocket book. What alternatives do you want to explore, and
why?
The first step is to determine if Crangles’ benefit costs are competitive in the industry. A
survey of the competitors should be conducted; the objective is to obtain information
about the types of benefits offered and which, if any, benefit costs are shared among the
changes.
5. Google is famous for paying wages significantly above the market and also providing
employee benefits that one might call lavish. Currently the European Union is suing
Google for its monopolistic behavior, claiming that the company’s internet search
function systematically favors its own comparison shopping products in its search
results pages. (Their products turn up earlier in the search effort.) Assume the
European Union wins this antitrust case resulting in significant financial loss to
Google. Speculate on what Google might change about its benefits package as a
consequence of this ruling.
The best guess is that Google wouldn’t change anything about either its wage or benefits
policy and practices. Their basic organization strategy, the thing that drives compensation
are responding to the EU threat is better than the strategy adopted by Microsoft who faced
