Reading: Lesson 5 - Employee Benefits

12.5.A - Employee Benefits

1. FORMS OF EMPLOYEE BENEFITS

1. In addition to pay, employees often receive other valuable benefits from their employer as part of their total compensation. When employees make decisions about which employer to work for or whether to accept a promotion, the wage or salary level is often considered the most critical factor in the decision. However, the total compensation package may be more important. One job may pay substantially more than another, but if the second job provides a number of benefits and the company pays most or all of the cost of those benefits, the total compensation may be higher for the second job. Having insurance, paid vacations, medical leave, and contributions to a retirement plan can make an otherwise lower-paying job more attractive. Employee benefits are all forms of compensation and services that a company provides to employees in addition to salaries and wages. Employee benefits can significantly increase the total compensation an employee receives. They can also increase the costs to the employer. On average, companies spend an additional 20 to 40 percent of employee wages and salaries on benefits. Assume that a company employs 300 people at an average salary of $30,000. In addition to the $9,000,000 in salaries, the cost of benefits may be as much as $3,600,000. On a base salary of $30,000, the average employee receives as much as $42,000 in total compensation. If the employer did not pay for those benefits, employees would have to pay the costs from their wages and salaries to obtain insurance, establish a retirement fund, or take a day off for vacation or illness.
   
2. Businesses offer a variety of employee benefits. Those more commonly provided include insurance plans, retirement plans, and paid time off. In addition, businesses must provide certain benefits as mandated by federal and state laws.
   
3. Many businesses make it possible for their employees to obtain insurance at lower costs through group insurance policies. Health, vision, dental, life, and disability insurance are common types of coverage provided. The company may pay part or all of the employee’s insurance costs, especially among larger employers under the Patient Protection and Affordable Care Act. Most business insurance plans offer optional coverage for the employee’s family members. Although employees usually must pay the additional cost for family coverage, they pay a much lower rate than if they purchased the same insurance privately.
   
4. As employees get older and begin to consider retirement, they become increasingly concerned about the income they will need once they stop working. Retirement plans are designed to meet that need. There are two major categories of retirement plans available to employees. A defined benefit plan (or pension) provides a specific monthly benefit to retired employees determined by their years of employment and total earnings while employed. A defined contribution plan requires regular payments to an employee retirement account but does not guarantee a specific monthly benefit to be paid on retirement. Instead, the amount of retirement income depends on the value of the earnings from the investments. Defined benefit plans are rare in today’s workplace and are usually funded entirely by the employer who manages the investments in order to pay the retirement benefits. Defined contribution plans may be funded by the employer, the employee, or by contributions from each and are managed by an investment company. The Figure below compares several types of defined contribution plans. 
   

   
   

5. Employee contributions to most retirement plans are tax-deferred, meaning the contribution is made before taxes are calculated on the employee’s income. Tax deferment reduces the amount of income taxes to be paid in the current year. When the employee retires, the financial benefits received are taxed. In addition to the common retirement plans, some companies provide special funds to reward employees. A profit-sharing plan makes contributions to employee retirement funds based on the profits earned by the company during the year. The amount varies annually, and there are no contributions when the company does not make a profit. Profit sharing encourages employees to undertake activities that increase company profits in order to obtain the benefit. Stock-bonus plans are similar to profit-sharing plans, but contributions to employee retirement are made in the form of company stock. The value of the employee’s retirement funds rises and falls with the value of the stock.
   

6. After employees have worked for a company for a specified time, often one year, they may begin to earn vacation days. Most companies pay employees their regular wage or salary during approved vacations. In addition to earned vacations, some companies are closed for holidays and may pay their employees for those days. Other common benefits are paid or unpaid days for absences due to illness or to attend to personal business, the illness or death of family members, and the birth or adoption of a child. companies pay employees their regular wage or salary during approved vacations. In addition to earned vacations, some companies are closed for holidays and may pay their employees for those days. Other common benefits are paid or unpaid days for absences due to illness or to attend to personal business, the illness or death of family members, and the birth or adoption of a child.
   

7. To respond to the changing lifestyles and the operating needs of businesses, some companies are moving away from the standard 40-hour, five-day workweek. One alternative involves scheduling employees to work 10 hours a day for four days per week. Another variation, flex-time, lets employees choose their own work hours within specified limits. Job sharing allows two people to share one full-time position. Each person works half the time, either half days or alternating days of the week. Companies may also stagger the workweek by having some employees start their week on days other than Monday. In this way, the business can operate seven days a week without having employees work more than five days, thereby obtaining maximum use of facilities and equipment while controlling labor costs. It is also a way to reduce traffic congestion or demands on employee services, such as parking and food services, at peak times.
   

8. Increasingly, businesses are providing other types of benefits for employees. Many companies provide free or low-cost parking, food services and cafeterias, and discounts on the purchase of products produced or sold by the company. Many businesses contribute to the cost of college courses or other educational programs completed by employees. More and more companies are allowing employees to take time off to participate in school and community programs including volunteer opportunities. Some companies today even offer unique services, such as hiring someone to do grocery and gift shopping or take clothing to a dry cleaner for busy employees and offering transportation to employees who carpool but need to go home due to an emergency. Free or low-cost professional services for employees, including the services of financial and investment advisers, lawyers, accountants, and counselors, are offered as part of many benefit plans today. Other increasingly important benefits are programs that help employees locate and pay for convenient care for children or other family members such as elderly parents and grandparents. Companies offer new benefits as employee needs change and as companies compete to attract and keep good employees. Because individual needs can be quite different, businesses have a difficult time providing the right set of benefits for every employee. Some companies have attempted to solve that problem by letting employees choose a number of options from among a list of available benefits. A program in which employees can select the benefits that meet their personal needs is known as a cafeteria plan. In this program, each employee can choose among benefits with equal value or give up certain benefits and receive their cost as additional compensation. Under IRS regulations, some benefits are taxable while others are not. Employers must carefully construct the cafeteria plan options to meet legal requirements and assist employees in making appropriate choices.
   

2. IMPROVING HUMAN RESOURCES SERVICES

1. Companies are looking at ways to improve human resources services while controlling the costs of providing those services. They are finding many ways to use technology to reduce paperwork and streamline the process of maintaining and distributing information to employees. Some companies complete these processes with the help of other businesses that specialize in managing human resources activities.
   
2. Managing human resources requires a great deal of information pertaining to every employee in the organization. Much of the cost of managing human resources goes into the efforts needed to gather and update this information. Employees must fill out a number of forms when they join the company. HR employees must make copies, store them, and retrieve them when needed. Whenever a change occurs, the process must be repeated. Computers have greatly improved the processes companies use to gather and store employment information. Some companies use computerized forms to collect information and store it electronically. This makes entering, retrieving, and updating personnel information much more efficient. When an employee gets a raise or promotion, HR employees can easily make changes in the computer system. Some companies allow employees to access the system to update personal information such as their address or phone number. To keep records confidential, companies take security precautions, such as limiting access and requiring a password to access employees’ files.
   
3. The Internet has also made HR activities more efficient. It provides a way for employers and job seekers to exchange information. Companies can use the Internet to communicate new policies or new benefit options to employees throughout the company and the world. Companies may even set up information kiosks in cafeterias and break rooms, so employees can easily check on benefits and other employment information. People participating in employee evaluation, such as the 360-degree performance feedback process, can complete their evaluation forms online. 
   
4. Some companies are now outsourcing some or all of their HR services. Outsourcing is hiring an outside firm to perform specialized tasks. For example, a company may hire an outside employment agency to perform all of its employment activities, including recruiting, selecting, and even training employees. A second common use of outsourcing in human resources is to contract with an information systems company to manage all the personnel data within human resources.