Human Resource

Management
TENTH EDITON

Chapter 8

Managing Employee Benefits

 Benefits

▪ Benefit
– An indirect compensation given to an employee or
group of employees as a part of organizational
membership.
▪ Strategic Perspectives on Benefits
– Benefits absorb social costs for health care and
retirement.
– Benefits influence employee decisions about
employers (e.g., recruitment and retirement).
– Benefits are increasingly seen as entitlements.
– Benefit costs are about 40% of total payroll costs.
 How the Benefit Dollar Is Spent

Source: Based on information in Employee Benefits, 2000

edition (Washington, D.C.: U.S. Chamber of Commerce, 2000). Figure 8–1
 Benefit Needs Analysis

▪ Benefit Needs Analysis

– A comprehensive look at all aspects of benefits.
• How much total compensation?
• What part of total compensation should benefits
comprise?
• What expense levels are acceptable for each benefit?
• Which employees should get which benefits?
• What are we getting in return for the benefit?
• How will offering benefits affect turnover, recruiting,
and retention of employees?
• How flexible should the benefits package be?
 Types of Benefits

Figure 8–2
 Security Benefits

▪ Worker’s Compensation
– Benefits provided to persons injured on the job.
▪ Unemployment Compensation
– A Federal/state payroll tax that funds state
unemployment systems.
– Involuntary unemployment and actively seeking
work is required for persons to claim benefit.
▪ Supplemental Unemployment Benefits (SUB)
– A union-negotiated benefit provision that pays a
supplemental amount to laid-off employees who are
drawing unemployment compensation.
 Security Benefits (cont’d)

▪ Severance Pay
– A security benefit voluntarily offered by employer to
employees who lose their jobs.
– Payments are determined by the employee’s level
within the organization and years of employment.
– Other benefits (e.g., outplacement and continued
health insurance) may be offered in lieu of cash
severance payments.
 Services During Severance

Source: Linda Jones, “Severance Policies in Place

at Most Organizations,” Human Resource
Executive, May 1, 2001, 28. Used with permission. Figure 8–3
 Median Age at Retirement by Gender

Source: U.S. Bureau of Labor Statistics. *Projected. Figure 8–4

 Retirement Security Benefits

▪ Retirements and Age Discrimination

– Age Discrimination in Employment Act (ADEA)
prohibits mandatory retirement age provisions.
▪ Social Security Act of 1935
– Established a system providing old age, survivor’s,
disability, and retirement benefits.
– Federal payroll tax on both the employer and the
employee.
– Benefit payments are based on employee’s lifetime
earnings.
 Pension Plans

▪ Pension Plans
– Retirement benefits established and funded by
employers and employees.
▪ Traditional Benefit Plans
– Defined-benefit plans
• Employees are promised a definite pension amount
based on age and length of service.
– Defined-contribution plans
• Employer makes an annual payment to an employee’s
account.
• Benefit payout is determined by the financial
performance of the employee’s retirement.
 Pension Plans

▪ Cash Balance Plans

– A hybrid plan that defines retirement benefits in
terms of a hypothetical account balance.
▪ Employee Retirement Income Security Act
(ERISA)
– Regulates pension funds to assure their soundness.
– Requires firms to offer retirement plans to all
employees if offered to any employees.
– Accrued benefits must be paid to departing
employees.
– Requires minimum funding for IRS approval and
purchase of plan termination insurance.
 Pension Terms and Concepts

▪ Contributory Plan
– Both employer and employee pay money into the
retirement fund.
▪ Non-contributory Plan
– All pension benefits funding is paid by the employer.
▪ Vesting
– The right of employees to receive benefits from their
pension plans.
▪ Portability
– A pension plan feature that allows employees to
move their benefits from one employer to another.
 Individual Retirement

Individual
401(k) and
Retirement
403 (b) Plans
Accounts (IRAs)

Individual
Retirement
Options

Keogh
Plans
 401(k) for Small Business

Source: Based on data in Virginia Munger Kahn, “Pension

Plans for Everyone,” Business Week Small Biz, July 16, 2001,
22. Figure 8–5
 Controlling Health-Care Benefits Costs

▪ Co-Payment
– Employees are required to pay a portion of the cost
of both insurance premiums and medical care.
▪ Defined Contribution Plans for Health Benefits
– Employer provides a set amount that the employee
may spend on health-care coverage benefits.
 Controlling Health-Care Costs (cont’d)

▪ Managed Care
– Approaches that monitor and reduce medical costs
using restrictions and market system alternatives.
▪ Preferred Provider Organization
– A health-care provider that contract with an
employer group to provide health-care services to
employees at a competitive rate.
▪ Health Maintenance Organization (HMO)
– A managed care plan that provides services for a
fixed period on a prepaid basis.
 Increases in Health-Care Benefits Costs
to Employers

Source: U.S. Bureau of Labor Statistics, U.S. Department of Labor, 2002. Figure 8–6
 Health-Care Legislation

▪ COBRA Provisions
– Former employees, their spouses, and eligible
dependents are covered for 18 to 36 months
– Up to 102% of group premium costs paid by the
former employee.
▪ HIPPA Provisions
– Allows employees to switch their health insurance
plan from one company to another, regardless of
pre-existing health conditions.
– Health plans must continue to cover sick
employees.
 U.S. Population Lacking Health Insurance

Source: U.S. Census Bureau, 2002. Figure 8–7

 Other Benefits

Credit Unions
Purchase Discounts
Stock Investment

Family-Care Relocation
Benefits Expenses

Family-Oriented
Benefits Life, Disability,
Benefits Legal Insurances

Social and Educational

Recreational Assistance
 Family Medical Leave Act (FMLA)

▪ Coverage
– Employers with 50 or more employees
▪ Requirements
– Employers must allow eligible employees to take up
to a total of 12 weeks of unpaid leave to attend to a
family or serious medical condition.
– Employees have the right to continued health
benefits and the right to return to their job.
Most Common Paid Holidays in the U.S.

Figure 8–8
 Companies Offering Different Types of Paid Time Off

Source: “Employee Benefits Survey Technical Note,” Compensation and Working

Conditions (Washington, DC: U.S. Bureau of Labor Statistics), Fall 2000. Figure 8–9
 Time-Off Benefits

▪ Holiday Pay ▪ Leaves of Absence

– Eligibility – Family Leave
▪ Vacation Pay – Medical and Sick Leave
– Paid Time-Off (PTO) Plans
– Military Leave
– Election Leave
– Jury-duty Leave
– Funeral Leave
 Benefits Administration

▪ Benefits Communication
– Benefits Statements
• Annual “personal statement of benefits” that translates
the benefits into dollars to show their worth.
– HRIS and Benefits Communication
• HRIS information allows employees to obtain benefits
information on-line.
Typical Division of HR Responsibilities:
Benefits Administration

Figure 8–10
 Flexible Benefits

▪ Flexible Benefit Plan

– A plan (flex or cafeteria) that allows employees to
select the benefits they prefer from groups of
benefits established by the employer.
▪ Flexible Spending Accounts
– An account that allows employees to contribute
pre-tax dollars to buy additional benefits (e.g., life
insurance).
▪ Problems with Flexible Plans
– Inappropriate benefits package choices
– Adverse selection and use of specific benefits by
higher-risk employees
Pension and Retirement Functions on the Internet

Figure 8–11