CHAPTER 7: BENEFIT PROGRAMS IN THE INTERNET AGE

Overview: This textbook chapter examines how to plan employee benefit packages while controlling costs.

Corresponding course:

53 Employee Benefits Strategies

INTRODUCTION

"Why are they so anxious to offer improved maternity benefits in our health program? After all, at 50 I'm not likely to care about that!"

"What do you think the union is going to demand in new benefits this time around?"

"It sure is hard to have a retirement plan plan when you have to meet all these government requirements!"

"Why should we worry when there is Social Security?"

"We have got to do something to get the medical program costs under control. I want a plan by next week!"

Essentially the wage form decision is a choice between taking payment in a periodic paycheck or deferring it in some form of benefit. Either one is a cost to the organization. There are reasons, however, from both an organizational and a personal standpoint that some proportion of the total wages paid to employees should be in the form of benefits.

BENEFIT PROGRAMS

The total wage cost of an employee to the organization is far more than the pay rate of that employee. Likewise, the total compensation reward of the employee exceeds his or her take-home pay. Total compensation consists partly of the pay of the employee and partly of a set of other rewards that are loosely called benefits. The addition of these items to the compensation package complicates the administration of compensation considerably. Benefits are unlike base pay in that they are awarded for different objectives, they are not periodically given, they are oftentimes deferred rather than current, and they require different types of administration.  The basic decision is often called the wage form decision because, since pay and benefits together make up the wage costs of the organization, there is a trade-off between direct pay and benefits. Benefits are becoming more important in compensation administration as they become a larger proportion of total compensation.¹ Today it is especially important to properly manage them.

Membership Rewards

Benefits are important as a reward, in that organizations wish to reward employees not only for their job and performance, but also for their membership in the organization. The rewards discussed are ordinarily given to employees on the basis of being members of the organization, not on the basis of the job held or performance on that job. Thus they are called membership rewards.

The emergence of membership rewards attests to the differences between the employment exchange and the economic exchange as it is narrowly conceived. These rewards indicate that organizations are aware that in the employment exchange they are purchasing not only labor services but also organizational attachment sufficient to provide the continuity required to accomplish their goals. Thus, membership rewards are evidence that organizations take a broader view of the employment exchange than is traditionally embodied in wage and salary administration.

If this view is correct, membership rewards in organizations would be expected to vary with the breadth of the organization's view of the employment exchange. Viewing the employment exchange strictly in economic terms would be expected to lead to few membership rewards and to temporary employment of the employee. On the other hand, viewing the employment exchange in a broader sense should lead to a broad base of membership rewards, as the organization attempts to secure long-term commitment from its employees. This situation is much more typical in a primary labor market.²

Employees, too, find it useful to broaden the definition of the employment exchange and seek membership rewards from their employer.  Those employee groups with the strongest commitment to the organization have always received membership rewards.  When groups are requested by the organization to increase their organizational commitment, they typically request more membership rewards. Thus, organizations that request and/or require high levels of commitment over time find considerable pressure from employees for membership rewards.  Fortunately, this thought process does not have to be conscious on the part of either the organization or the individual to be valid.

Diversity of membership rewards

Unlike establishing a specific wage rate for a person, the determination of membership rewards is fragmented rather than unitary. It represents a hodgepodge of economic rewards, most of which are awarded on the basis of the person accepting the role of being an employee. Unfortunately, none of the parties to the exchange has a clear definition of the boundaries of this set of rewards. There is a lack of agreement on what is or is not to be included, the purposes to be served, responsibility for programs, the cost and value of the various elements, the units of measurement for determining worth, and the criteria to be used.  As a result, decisions in the area of membership rewards are more complex and confusing than those involved in determining wages and salaries.

This complexity is increased by the ambivalence shown by both organizations and employees toward membership rewards. As stated, organizations find that consideration of membership rewards is outside of their typical economic definition of the employment exchange. So while they perceive the need for these rewards, they do not fit them into their definition of the exchange. Employees and their representatives also have ambivalent feelings. Membership rewards are often viewed by employees not so much as rewards for membership, but as a right accompanying employment. Indeed this position is supported by much of the legislation in the field.

Terminology

Just as the particular rewards that constitute membership rewards are diverse, so is their terminology. Fringe benefits is the most common name given to this set of rewards, but indirect compensation, wage supplements, non-wage benefits, social wages, supplementary employee remuneration, supplementary compensation, and indirect payments have also been used. Here simple term benefits will be used.

All of these terms suggest that these rewards are ancillary and not a significant part of total compensation.  Neither is true. As indicated, membership rewards are important in maintaining a consistent work force. These rewards can no longer be considered a small part of the total compensation package when their total cost exceeds 50 percent of direct wage payments.³

There is no common definition of what is included in the benefit package. Two historic organizations, the U.S. Chamber of Commerce and the Bureau of Labor Statistics, have been conducting surveys of benefit costs for over 50 years.⁴ Both include social insurance, private welfare plans, and paid leave; but the BLS also includes premium pay, while the Chamber of Commerce includes company-paid time off the job and certain employee services. 

There are other classifications of benefits. A common one is offered by Sargent and has the following categories: (1) pay for time not worked; (2) monetary rewards and prizes for special activities and performance; (3) contributions and profit sharing; (4) payments for employee security; and (5) practices and services that benefit employees.⁵

Organizations differ considerably in what they include in their own definitions. For instance, some will include legally required benefits, and others only the ones that are voluntary. Unions and management also often differ, with unions often excluding employee services, premium pay, and paid leave.⁶ Some of these differences as to what constitutes benefits are a function of whether certain costs are seen as obligations of employers for the social welfare of their employees and therefore not as rewards at all.⁷ A basic premise of this viewpoint is that unions turned to employers to provide benefits when it became apparent that they would not be provided through social legislation. These benefits do not constitute rewards so much as rights of the employed individual. If this analysis is valid, we could expect increased pressure on organizations to provide benefits as long as the atmosphere in Washington is "hands off" toward social programs. The current push for day care can be seen as an expression of this viewpoint.

The confusion in benefit definition does not provide organizations with a good way of defining the benefit package. A better way is to work backwards from the total cost of having a person on the payroll. Benefits would then be all costs beyond the direct wage paid to the individual. The BLS has defined total compensation as all payments to employees subject to income-tax withholding and all payments made by the employer to government agencies, insurance companies, or trustees for insurance and welfare. This would leave out employee services, which probably should be added if the organization wishes to get a complete picture of employee cost. Exhibit 7-1 is a list of items that might be included as benefits.

None of the above discussion describes the purpose for the organization providing the reward. The common viewpoint is that the major purpose of all this hodgepodge of rewards is to increase the attractiveness of the organization to the individual, so that he or she will continue as an employee. Remember, however, that for a reward to be a part of the employment exchange, it must be perceived and considered relevant. Unlike the paycheck, many of these benefits are hidden from the employee, especially if they are deferred for long periods. This suggests that benefit administration requires a large component of communication.

Exhibit 7-1. Examples of Benefits

1. Extra payments for time worked:

Weekend premiums
Holiday premiums
Overtime premiums
Shift premiums

2. Non-production awards and bonuses:

Anniversary awards
Attendance bonus
Christmas bonus
Quality bonus
Safety awards
Shift premiums
Weekend premiums
Service bonus
Suggestion awards
Waste-elimination bonus
Year-end bonus

3. Payments for time not worked:

Call-back pay
Call-in pay
Clean-up time
Clothes-changing time
Dental-care time
Down time
Family allowances
Holidays paid for but not worked
Jury duty time
Lay-off pay
Medical time
Military induction bonus
Military service allowance
National Guard duty
Paid death-in-family leave
Paid lunch periods
Paid sick leave
Portal-to-portal pay
Religious holidays
Reporting pay
Reserve military duty
Rest periods
Room and board allowances
Severance pay
Supper money
Time spent on contract negotiation
Time spent on grievances
Vacation pay
Voting time
Witness time

4. Payments for employee security,

Contributions toward:

accident insurance
disability insurance
hospitalization insurance
life insurance
medical insurance
surgical insurance
Contributions to state disability insurance
OASI contributions
Contributions to unemployment compensation
Supplements to unemployment compensation
Contributions to Workers' Compensation
Supplements to Workers' Compensation
Contributions to employee thrift plan
Contributions to employee stock purchase plans
Credit union
Employee loan association
Health and welfare funds
Home financing
Mutual benefit association
Payment of optical expenses
Pensions
Savings Bond administration

5. Payents for employee services:

Annual reports to employees
Beauty parlors
Cafeteria
Canteen service
Company athletic teams
Company housing
Company stores
Day Care
Income tax service
Information racks
Dietetic advice
Educational assistance
Employee counseling
Employee discounts on purchases
Employee parties
Employee pleasure trips
Employee publications
Financial advice
Flowers for ill and deceased employees and families
Free laundry
Free meals
Functions for retired employees
Health education
Hospital Facilities
Legal aid
Lunch period entertainment
Medical examinations (voluntary)
Music at work
Paid club memberships
Paid subscriptions to magazines
Parking space operation
Purchasing service
Reading room facilities
Recreational facilities
Rest room facilities
Safety clothes at company expense
Safety programs
Scholarships
Shower and locker rooms
Transportation
Vacation facilities
Visiting nurse
Wedding gifts
Work clothes at company expense

THE GROWTH IN BENEFITS

Originally membership rewards were called fringe benefits because they were only a small portion of the total compensation package. Not so today. The growth of benefits has far exceeded the increase in wages, even during inflationary periods, for the past 40 years. In fact, the growth has been three times that of wages and salaries.⁸

The Chamber of Commerce found that by 1980, benefits were accounting for 36.9 percent of payroll, or an average of $6,084 per employee; in the year 2000, that estimate was 42.3 percent of payroll, or well over $11,000 per employee. The total benefit bill in the country ran about $435 billion in 1980, in 2000 it was close to $1 trillion.⁹ 

There does not seem to be any significant lessening of this growth. The increases have come about in two ways. First, there has been a considerable increase over time in the number of benefits offered by employers. Second, the cost of the benefits themselves has risen dramatically. Health insurance is the prime example of the latter.

The figures just cited, however, are averages and do not represent the amounts spent on benefits by particular organizations or industries. When it comes to expenditures on benefits, there exists a good deal of variation between industries, as well as between companies within an industry. The petroleum industry spends over half of its total compensation dollar on benefits; hospitals spend a little over a quarter. Traditionally, government organizations have offered higher benefits or at least are perceived as doing so.¹⁰ These variations may represent a number of differences in compensation policy, including the emphasis placed upon the value of continuity in membership.

This dramatic growth in benefits has come about for a number of reasons. These include (1) changes in the economy, (2) social responsibility, (3) government influence, (4) union demands, and (5) employee interests.

CHANGES IN THE ECONOMY

The continuing industrialization in modern times, or more accurately the move toward a postindustrial society, has created changes that encourage organizations to provide more benefits to employees. One of the effects of an increasing standard of living is that people's desire for leisure increases in proportion to their desire for more wages. In economic terms, the elasticity of the supply of labor is such that as wages rise, there is a point at which leisure becomes more appealing than more work, even work at a higher wage. At this point there is a demand for more time off by employees in North America, mirroring the European trend.¹¹

Continuing industrialization and consequent changes in modes of living have brought new risks to the employee and increased old ones. At the same time increased productivity has afforded programs that provide security against these risks.  Economic security in a society in which most individuals are employees depends on finding and keeping a job. Any threat to continuing employment becomes a risk to the employee and the family, and creates a demand for insurance against such risk. The result is that at least a portion of individual compensation represents protection against insecurity.

Social Responsibility

Social responsibility may not be the best name for the response by employers to the needs of their employees, but it does get across the point. As far back as the 1920s, organizations began to realize that their employees were assets that needed to be preserved rather than exploited. This awareness has varied over time. At first there was a reaction to unions that created an era of paternalism, encouraging employers to offer many employee services in the hope that employees would see that their employers had their best interests at heart. This would keep the employees from joining a union.¹²

Recently there has been a new trend in providing employee services, but the motivation is different. Today it is seen that an employee who is healthy, both physically and mentally, is a more productive person. This has led to a series of employee services, such as athletic facilities and counseling in areas such as smoking and drug abuse, intended to create and maintain a healthy work force.¹³

A current issue in this area is whether employers have a responsibility to provide care for children of employees. With the increase in the number of women in the work force and the number of working women who are the only support of their families, the demand for day-care facilities for children has increased dramatically.  There is presently considerable debate as to who is going to provide these facilities, but it is clear that employers will play an important part. There is evidence that facilities close to the work site provide a better solution than those near the home.¹⁴

Government Influence

The influence of government on benefits has come in three ways: directly through legislation, directly through attempts to control the economy, and indirectly through the tax laws. In the 1930s there was a flurry of legislation that produced organizational requirements in the areas of Workers' Compensation, unemployment compensation, Social Security, Old Age and Survivors' Benefits, and disability insurance.  More recently, some state legislation has provided for employer and employee contributions toward non-work accidents and illnesses.

Since the 1960s there has been a new flurry of legislation, designed not to create new benefits but to control programs currently offered by organizations. The most critical of these acts are the Employee Retirement Income Security Act (ERISA), dealing with retirement plans; the Civil Rights Act, which affects all areas of benefits; the Occupational Safety and Health Act (OSHA), which deals with safety standards on the job; and the Consolidated Omnibus Reconciliation Act (COBRA) and the Health Insurance Portability Act (HIPAA), which deal with health insurance.

The latter act, HIPAA, is worthy of full study.   Since 1974, U.S. federal law has been firmly established related to welfare and retirement benefits.  States are not allowed to pass laws that supersede ERISA. For medical benefits and insurance, that feature (which allowed companies to easily operate across state boundaries) has now been amended by HIPAA so that states that pass laws that are more favorable to employees related to medical benefits have the right to supersede federal law. Companies must now deal with the fact that certain states Kentucky, for example, mandates chiropractic services be provided, while most others states do not.

At times, usually wartime, the government has imposed wage and price controls. These controls have given a strong impetus to the growth of benefits by permitting improvements in benefits while discouraging wage and salary increases on the grounds that the latter would contribute to inflationary pressures (while the former would not). Clearly, this view is that benefits are fringes.

An equally important,but indirect, influence of the government on benefits has been income-tax legislation.  High corporate income-tax rates make it advantageous for employers to include as business expenses a wide range of benefits, particularly those to executives. Since most of these benefits are not taxed as income, provision of these benefits results in huge savings for the employer. The future of this reason for benefits is in doubt.  Most suggestions for income-tax reform contain restrictions on what organizations can write off as expenses, and most propose to tax at least some benefits.

Union Demands

Union demands have served to increase benefits as a proportion of total pay. The growth of the unions during the 1930s occurred largely in the mass-production industries. Workers in these industries were much more prone to the risks of industrial life than were craft workers, and so the leaders of industrial unions made it a point to demand protection from insecurity for their members.

In this way union leaders of industrial unions have fostered member interest in programs providing protection from insecurity.  Sometimes a benefit has been demanded to establish a principle of employer responsibility for risks facing workers. The UAW's fight for the guaranteed annual wage is a case in point: the union felt that a large portion of the down time in model changeovers could be reduced by management. At other times, benefits have been sought when pay increases appeared infeasible. A.M. Ross has suggested that unions have sought to expand benefits for a number of reasons, including their desire for (1) increased status, (2) security, (3) a shorter work week, (4) more strength in the eyes of its members, and (5) the development of the plant as a community.¹⁵

Employee Interest

To the employee, the advantages of benefits are many.  Certainly the two most prevalent are the tax advantages mentioned and the lower cost of receiving the benefit by belonging to a group. The fact that over half of all benefits are intended to reduce economic insecurity suggests that both employers and employees are aware that life in an industrial society requires these protections.

At best, however, employee attitudes toward benefits are ambivalent. On one hand, people seem very interested in benefits, since this is a major item of consideration in the recruiting process. On the other hand, most employees do not know what benefits the organization is providing them and particularly the cost to the organization of those benefits.   In a way, benefits appear to be a classic case of what Frederick Herzberg calls a hygiene factor or dissatisfier.¹⁶ When the benefit is absent, the person wants it.  When it is present, it has no positive motivational force.

Early studies of benefits found that they were not very important to employees.¹⁷ More recent studies have shown a consistent upturn in interest in benefits. The increasing standard of living would suggest this, given the preceding analysis of the value of money versus benefits at high levels of income. Newer studies have shown that employees place a high value on benefits, even beyond their tax advantages and reduced price. Employees differ understandably in their demand for benefits and even more clearly in the types of benefits they demand.  This seems to vary most noticeably with the personal circumstances of the employee. Young employees desire fewer benefits compared with wages and time off. Employees with dependents value medical benefits greatly, and the desire for good retirement plan benefits understandably rises with age.¹⁸ In all these cases, it should be noted that employees base their decision on their perceived need, and not on the cost of the benefit to the organization.

The demographics of an organization's employees offer a hint as to the needs and preferences of its members, but they are not an infallible guide. William F. Glueck, in a review of employee-preference studies, found that some demographic characteristics (particularly age and marital status) were good predictors of benefit preference, but that others (such as sex, age, and occupation) were not.¹⁹ Clearly there is a ranking of desirability of benefits by individuals, but it is not wholly predictable by employee characteristics.

WHY BENEFITS?

The use of benefits in the compensation package makes the process of compensating employees much more complex.  As indicated, benefits are a hodgepodge of items, and planning and administering them is time-consuming, costly and takes an expertise not available in many organizations. So the question can be raised whether it is worth it to include benefits in the compensation package. In summary, the following reasons can be put forth as to why organizations have benefits in their compensation package:

1. They are required by law. Most employees are covered by a number of federal and state laws requiring that the organization provide a minimum level of benefits as a condition of employing people.

2. They are desired by employees. Despite the misunderstanding and ambivalence of employees toward benefits, employees insist upon them and they are a major recruiting tool. Benefits probably increase the satisfaction of employees or at least reduce dissatisfaction. The effect of this has been shown to be lower turnover.

3. They are demanded by unions. Benefits provide alternative bargaining chips when direct confrontation over wages is not feasible or desirable.

4. They help to develop an atmosphere of trust in the organization. Taking care of employees through benefit programs increases the feeling that the relationship between the organization and the individual goes beyond an economic transaction.

5. They provide more stability in the economy. The more that benefits are oriented toward reduction of insecurity among employees, the more stable is the economic environment. 

BENEFIT PLANNING

Decisions with respect to benefits are made more complex because of confusion of purpose, lack of agreement on which benefits do and do not constitute compensation, and the rapid growth of benefits and their costs. Perhaps the only point of agreement is that benefit administration is changing.

To the employer, decisions on benefits represent a large and growing proportion of compensation expenditures and thus a large part of the organization's contribution to the employment exchange.  To the union, benefits are often perceived as a social obligation of the employer and a right of the employee. To the employee, they represent protection from insecurity and a reward for continuing their employment with the organization.

The process of benefit planning, then, is one of deciding why benefits are being offered, what benefits to offer, and to whom?  The first of these, the why question, was discussed in the preceding section. The other two questions are examined in this section.

What Benefits to Offer

Superficially, benefit decisions are similar to wage level decisions.  In both instances, the basic issue to the employer is that of labor cost. The employer decision involves expenditures resulting from the employment exchange, and from a cost standpoint the organization is indifferent as to whether these costs are in the form of wages or benefits.  The tendency to talk about wages and benefits as a package reinforces this view.  Actually, however, decisions on benefits involve a number of choices different from other wage decisions. Benefits are not unitary, as are wages. There are many choices to make as to which ones to offer, and there are a number of influences on these decisions. Unions sometimes do and sometimes do not consider benefits to be pay equivalents. As indicated, employees value benefits differently. They do this not only on the basis of their own needs, but also upon being convinced of their importance by the union and management. Organizations differ greatly in the composition of their work force and thus on the needs and desires of their employees. The purpose served by the benefit decision ... that of membership ... is different from the job and performance considerations in the wage decision.  Some of the considerations in deciding what benefits to offer are treated in the rest of this section.

Legislation

Social legislation requires that the employer make expenditures for the health and safety of employees and for various forms of insurance to indemnify employee loss of income from illness and injury, unemployment, and old age.  The law also determines how the organization will develop and operate specific benefits, particularly retirement plans.  These expenditures are required whether or not the employer wants to make them and whether or not the employee desires the resultant benefit.

It might be argued that these expenditures are not truly compensation based upon the employment exchange but are merely a convenient method whereby society insures that its members are protected from certain risks. But to the employer, they are expenditures that arise from hiring people, they are of benefit to the employees, and they do substitute for or at least diminish the ability to pay direct wages.

It may be possible, however, that these benefits are not benefits in the eyes of the employee. The employment exchange requires that the person be aware of and consider as relevant any item for it to be a part of the exchange.  So if an employee is not aware of the employer's expenditure or does not care for the benefit, the employer is making a contribution to the exchange for which the organization is not receiving a return. The only alternative for the organization is to try to convince the employee of the importance of the benefit.

Legally required benefits currently cost employers a minimum of 10 percent of their payroll. These are the direct payments made and do not include administrative costs or costs of legal requirements affecting the workplace.²⁰

Benefit Surveys

Another consideration in benefit planning is industry and area practice regarding benefits. In order to keep employees, the organization must remain competitive for labor services, and knowing what benefits other employers are offering is necessary for decisions about what benefits to offer. Surveys of benefits, then, are conducted for the same reason as wage and salary surveys ... to obtain information on the conditions prevailing in the labor market.  Community wage surveys include a number of benefits practices. Employer-association wage and salary surveys customarily include benefit-program information. Without this information the wage rate information received in surveys may be misleading. The usual benefits survey seeks prevailing practice in the form of enumeration of the programs offered and descriptions of those programs and their coverage.  Tabulations consist of the number of responding organizations having each type of program and, if possible, variations in programs by employee group.

These benefit surveys show employer concern with the membership rewards of labor-market competitors.  They also accord with union interest in prevailing benefit practice.  But it should be noted that the information obtained in benefit surveys differs significantly from that received in wage and salary surveys. Wage survey results record wage costs. Benefit surveys record practice, and the costs of that practice to different organizations may be very different. This difference can result from differences in the organization's work force or in the methods used to finance the benefits.

Ideally, an organization would know both the benefits offered by competitors and the competitors' costs for those benefits.  But the cost figures are hard to get.  It is difficult to cost out individual benefits, and accounting practices vary considerably.  As indicated, some organizations see an item as a benefit and others do not. Cost information on individual benefits may not be useful, since the composition of the work force in each organization differs. What is probably more important is to know the total benefit costs of your organization and others.²¹

Other organizations' benefit practices and costs may not be relevant to your organization unless you know that your employees desire the benefits that others are offering. The next section discusses internal surveys of employee benefit needs and desires. Even if the benefit is desired by your employees, it is the cost to you and not other organizations' practice that may be most important. This suggests that the prevailing practice identified in surveys of other organizations should be costed out for your organization and this information used, along with employee preferences, in benefit decisions.

This section reinforces the complexity of benefit decisions. Compensation decision makers are charged with making sure that all expenditures for compensation benefit the organization. As benefits become a larger proportion of total compensation, the impact of benefit decisions is greater and more care must be taken with these decisions.  In wage decisions, comparison with other organizations may be an important consideration in order for the organization to be competitive in the labor market. In benefit decisions, however, although benefit practices of other organizations are one consideration, they are less important than the total cost of benefits and employee preferences. Unless employees want a particular benefit, they are unlikely to consider it a reward; therefore expenditures for that benefit do not enter the employment exchange and would not create value for the organization.

Organizational Benefit Plan Analysis

Surveys of prevailing benefits may have the dysfunctional consequence of encouraging particular benefit programs simply because they exist in other organizations and not because they are wanted or needed by the organization's employees. The present benefit structure in the U.S. suggests that benefit decisions have been motivated by competition based on a vague feeling that more benefits help an organization attract and retain employees rather than by a careful analysis of employee needs and preferences.

Internal organizational analysis of benefit practices would seem to require a comparison of current benefit offerings with the needs and preferences of employees. Our designation of benefits as membership rewards is an aid in this analysis, for it specifies the organization's purpose in offering benefits is to obtain and retain employees. But the analysis gets complex because individual employees and groups have different needs and preferences.

So the internal organizational analysis of benefits focuses on the needs and preferences of employees. Organizations differ in the demographic makeup of their work force, and this should, in turn, create differences in the types and levels of benefits that organizations offer. As discussed, there are some predictable differences based upon factors such as age and marital status, but the situation is so complex that it is hard to predict the exact benefit needs and preferences just from a knowledge of the organization's demographic makeup.

A survey of employee preferences for benefits can be done by developing and administering a questionnaire within the organization.  This questionnaire need not be very complex and can consist of a listing of possible benefits that are to be ranked in importance by the employee or rated on a scale of very important to very unimportant. It is useful to have the respondents also indicate their own characteristics so that the organization can determine if particular employee groups have predictable preferences.

From the results of the questionnaire, the desired and present benefits package can be compared. Unmet needs of employees may call for additional benefits.  But overlapping benefits that provide more protection than is desired are a waste of resources.  One of the most pressing problems in benefits today is that of overlapping benefits provided to the two income family.  When both members of the family work they are often covered under each other's benefit program. The result is that neither spouse's employing organization is receiving the maximum value from providing the benefits, and the employees are frustrated because they are receiving a duplicate unneeded reward.

Organizational Financial Analysis

A further part of the organization analysis is a comparison between direct wages and benefits, in terms of both cost and employee need. This comparison is needed for a couple of reasons. The first is to maintain a balance between direct wages and benefits.  Granting wage increases and benefit changes independently can lead to excessive increases in payroll costs where the organization loses control of the situation. Second, changes in wages directly affect the cost of benefits in areas such as vacation costs and holiday pay.

A further part of the organization's financial analysis is like a consideration also used in the wage level decision ... the employer's ability to pay. We have indicated that benefit programs are most often viewed as a package of individual benefits.  The emphasis on employee needs and preferences encourages this view of benefits. Decision making from this approach ordinarily focuses on identifying what the employee group needs and then finding out the current cost of that benefit. When installed, the benefit is then based upon the level of benefit and not the level of cost to the employer. In the field of medical insurance this has had a disastrous effect on employer costs.  The focus on the level of benefits leads employees to form their impressions of the employment exchange in terms of this level of coverage and not on the cost of that coverage.  This makes it hard for the employer to lower the level of coverage subsequently as costs rise beyond the value of the benefit.

The other problem with the coverage approach is that it is only the employer who is concerned with the problem of rising costs.  While the employee has the ability to control costs, but he or she has no incentive to do so.

A cost-based approach can use data from other companies, but such costs are likely to vary between organizations not only because of the different work-force characteristics described earlier but also because of other factors, such as ratio of labor cost to total cost, variability of demand, technical considerations requiring round-the-clock operations, and profitability. Companies with high profits tend to have high benefit costs, as do larger organizations, unionized organizations, and organizations in low-labor-cost industries.  Benefit expenditures vary also by geography and community size.

All the analysis discussed in this section and the previous one suggests that organizations would be advised to have on their staff experts in performing benefit analysis. Such benefit analyses require a knowledge of a specialized field. This is particularly true of the organization's insurance programs.  The increased cost of medical insurance and the legislative demands on retirement plan programs have made it imperative that organizations have a high degree of technical expertise available to them.

Collective Bargaining and Benefits

In unionized organizations the decision making just discussed is done largely at the bargaining table.  If it is assumed that union demands reflect employee preferences and that organizations have analyzed their own position, the results of collective bargaining can be advantageous to all parties.  The employees should be receiving the benefits they want, and unions are motivated to convince employees of the value of the benefits bargained for.

Unfortunately, unions often have goals that do not reflect employee preferences in particular organizations.  The union may be striving to institute a benefit in the whole industry or to satisfy a majority of the total union.  Because of the political nature of unionism, there is always pressure to achieve gains for the members, and benefits can often appear to be a big gain when pay increases are hard to bargain for. Further, union leaders often are caught in the same problem as the management of an organization with a diverse work force: there is no consensus on what the real needs and preferences of employees are.

Furthermore, if Allen is correct in concluding that benefits are perceived by unions not as compensation but as the social responsibility of employers  to be obtained at the bargaining table because they could not be obtained through social legislation, then unions have no reason for considering the needs and desires of particular employees and organizations.²² By this reasoning, benefits become prerequisite to the employment exchange rather than rewards from it, and unions may seek to attain them by calling them wages or non-wages, whatever strategy works. According to this view, unions represent all employees and not just their own constituency.

WHO RECEIVES BENEFITS?

If benefits are truly membership rewards and not job- or performance-related, then they should be equally available to all employees. However, if an organization needs continuity of employment from only some groups and doesn't care about turnover in other groups, a case can be made for having different packages of benefits for different employee groups. This is an extension of the cost/benefit argument, that these expenditures, like all others, should clearly bring something of value to the organization.

The costs of having different benefit packages for different employee groups are many.  First, this creates a status ladder in the organization in which there are the haves and the have-nots. This can create morale problems within the have-not group and tensions between the groups when they must work together to accomplish organizational goals. Second, there are administrative problems, such as deciding exactly which job titles fall into which categories and setting up a number of different plans. Third, there are external problems with insurance carriers when only some employees are covered; also there are legal problems with qualifying programs for tax purposes if only some employees are involved. Fourth, there are discrimination rules that pertain to some benefits within the U.S. (self-funded medical plans, cafeteria plans, dependent, and group life insurance).  This latter point may or may not be valid in that the U.S. IRS rarely appears to enforce these discrimination rules. HMOs and self-funded medical plans being a primary example.

Despite these problems, most organizations have at least two benefits packages, one for executives and one for all other employees.  Many organizations also pull out other groups for special consideration, such as sales personnel and technical employees.

The trend toward using part-time employees rather than full-time employees is based partly on the cost of benefits.  Using part-time employees, the employer can reduce the legally required benefits somewhat and other benefits entirely if the organization so wishes. Although this is the ultimate in different status for different employee groups, many organizations feel that the cost savings are worth the price.

The Cafeteria Approach

Different benefit programs for employee groups will be functional to the employment exchange to the extent that the group as a whole wants the set of benefits. But as discussed, employee groups are not always a good indicator of differences in benefit preferences of individuals. The only effective way to deal with individual variability in benefit preferences is to have each person decide what benefits to include and how much to allocate to each.  This is called the cafeteria approach.  The employee is assigned a dollar amount of compensation or a set of credits based on salary, seniority, and age that he or she can divide among a variety of benefit options; cash is sometimes included as an option.²³

From the discussion thus far, the cafeteria approach would seem to be an ideal approach to maximizing the employment-exchange potential. From the employee's standpoint needs and preferences can be accommodated. Further, the employee is making the decisions and so should be more aware of and committed to the outcome.  From the employer's standpoint there is a clear focus on the total cost of benefits for each employee. This cost can be more easily controlled by assigning a dollar amount to each person. There is a potential for tying rewards more closely to the behavior-membership desired by management.

There are a number of reasons for the slow acceptance of this concept. The first is an accounting problem. The payroll is made much more complex with each person having different deductions. Automated payroll programs, however, should be able to handle this situation. Second, insurance carriers develop their programs on the assumption that all employees will be covered. When all employees do not choose the option, the cost goes up for those who do choose it. Third, there is considerable concern about employee decision making.

This concern runs in opposite directions. On the one hand, there are concerns that the employee will choose very few benefits and focus on maximum cash, which will cause them regret if they become sick.  Also there are some benefits, especially the retirement plan, that people must invest in long before they are likely to perceive the benefit of it. On the other hand, there is a concern that employees may choose too many benefits and thereby distort the membership rewards vis-à-vis the job and performance rewards.

There is also a concern that unions will not accept the concept of the cafeteria approach, and that leaves the technique to nonunion organizations or to the nonunion sector of the organization.  This concern appears to be based upon the feeling that unions try to have everyone treated alike.²⁴

Last, there is the concern with Government reporting. Cafeteria plans sponsors are required to file annual Form 5500 reports with the IRS/DOL; to not do so, results in penalties of $10,000 and $30,000 over multiple instances, with penalties and interest. Often overlooked for what is a payroll system issue, these plans require more reporting and expense in their administration than they create in good will or benefit to employees.

A compromise position of the cafeteria approach is to develop a number of optional benefit programs and allow the employee to choose the one that best fits his or her needs. These options could be developed through a survey method, as described earlier. One author suggests that a number of packages be developed that follow what he calls the stages-of-man approach: each package would fit a person's situation for a five-year period. Each program would be equal in overall cost but differ in its coverage for each benefit.²⁵ Concerns for protection from insecurity could be taken care of in this alternative by building these benefits into all packages.

UNINTENDED EFFECTS OF ORGANIZATIONAL BENEFITS

In any planning process, it is useful to look as broadly as possible at the effects of the decisions being made.  This section briefly examines some of the issues that face employing organizations, unions, the economy, and society because of the method we have chosen to solve the problem of employee insecurity in this country.

Organizational Effects

Americans have chosen to solve the problems of insecurity arising from an industrial society very largely by private means.  This protection varies by industry and area as well as by organization size and unionization. Thus, employees of large, unionized organizations in metropolitan areas are well protected from insecurity and receive a large amount of leisure both on and off the job. On the other hand, employees of small, nonunion organizations may have only the limited protection provided by social legislation. Employees of many small organizations are not even covered by social legislation. This range between the haves and the have-nots grows wider with the growth of benefits, which shows no signs of abating.

A continuing disparity of this kind is an invitation to create public programs to redress the inequality.  The development of such programs brings into question how these required benefits are perceived by the employee.  If, as Allen suggests, benefits that are required of the organization become social responsibilities and are thereby taken out of the employment exchange, the organization may lose a reward that constitutes a large percentage of the total compensation program.²⁶

Benefits have a very definite place in the motivational scheme of the organization. They are a major motivator of continuing membership, but are not as useful for other purposes. This is an effect of the way they are administered, being available on the basis of being employed and/or length of service. Organizations may be wise to keep it this way. Making different motivational connections would be difficult and place the organization in the position of doing things that their employees perceive as illegitimate.  Furthermore, it may be functional to clearly delineate these rewards for membership so that the employee knows why certain rewards are being offered.  But all this is predicated on employees seeing these rewards as relevant to them; otherwise the benefit does not enter the employment exchange at all.

Benefit programs greatly increase the responsibility of employing organizations.  Underlying membership rewards is the assumption that the organization desires long-term employment and will provide it.  This commitment can reduce the ability of the organization to adapt to changing circumstances.  In addition, with the constant increase in benefits, the organization must be even more careful that additional employees are worth hiring.  As pointed out, there is now a trend toward using part-time and temporary employees because the commitment to full-time employees is so great; this is creating a new group of organizational have-nots.

Union Effects

Benefit program decisions also increase the responsibilities of unions. With each additional benefit, union responsibility for ensuring value to members would seem to increase along with the difficulties of carrying out this responsibility.  The same type of benefit analysis and expertise discussed earlier for organizations is probably required in unions as well. Also, although the political nature of unionism may explain obtaining benefits that some members may not need, it does not remove the moral issue. Furthermore, the tendency for unions to demand benefits obtained by other unions has resulted in benefits crossing industry lines, perhaps destroying economically justifiable differentials.  More serious for unions in partially unionized industries, the larger benefit programs in unionized firms appear to have intensified union-nonunion competition to the disadvantage of the unionized organization. In the past few years this has taken on an international scope, as American firms are having trouble competing with foreign companies. 

Economic and Social Effects

Benefit decisions of employers and unions may have unintended consequences for our economy. Our method of providing benefits by private means may have reduced our ability to compete in foreign markets. Although other industrialized nations have equal or higher benefits, their cost incidence is quite different. It can be argued that these benefits are social costs, paid in their entirety by the worker, regardless of how they are provided, but the effect on the employer's labor costs is quite different. In the U.S., benefits are provided through employment and these costs appear in employer labor costs. In many other countries, benefits are largely provided by employee contribution and general tax revenue and thus do not appear in the employer's labor costs.  Also, there appears to be a more selective approach to granting benefits only to those who need them rather than the more general approach taken in the United States. For both of these reasons our competitiveness may be decreasing.

Benefit decisions can also harm price stability.  When total compensation gains exceed productivity gains in the economy, inflation is the consequence. Benefit costs are often not given their full weight in calculating total compensation and so amount to a hidden inflationary tendency.

Benefit decisions may have three different effects upon employment.  The first is to encourage organizations to work employees overtime, since this does not significantly change the other benefit costs. The effect of this, of course, is to lower the employment level.  The second effect is to encourage organizations to hire part-time and temporary employees to whom the organization does not have to pay these expensive benefits. Beginning in the mid 1990s, “outsourcing” gained strength in America as companies employed the employees of other firms (staffing companies) to complete assignments. It is estimated that within the U.S. in the Year 2000, almost 24% of American workers were temporary, outsourced, part-time, or on contracts that could be immediately terminated. With the shift in the U.S. to a service economy from an industrial one, a long-term view could be quite discomforting. If it takes 25 minutes to lay off 24% of U.S. workers and 25 days to pay their residual pay, the U.S. could be 25 days away from 25% unemployment.

Another area in which there is a great deal of potential impact on benefit decisions is labor mobility. Although logic and some studies suggest that benefits are among the factors that tie people to organizations,²⁷ it has not been shown conclusively that retirement plans do so.²⁸ The most accurate statement is that organizations need a well-devised communications program both to inform employees of what their benefits are and to persuade them that they are valuable rewards. There is the probability that benefits are one of a number of factors in the employment exchange that tie people to organizations.

It may be worth examining whether protections from insecurity provided through employment have weakened community efforts to provide group protection. In order to be protected one must be employed, but it is when one is not employed that there is the greatest need. Also when those not covered are those not employed, they represent a group whose cost to cover is much higher than the average.

ADMINISTRATION OF BENEFITS

Benefit administrators do more than plan what benefits to offer and to whom. They must take care of the benefit package that is in effect. This administrative task consists of processing claims related to the benefits, communicating the benefit package to the employees, and monitoring the changing environment of benefits.

Processing Claims

Employees ordinarily have to request that benefits be invoked, and it is up to the organization or others, such as insurance companies, to decide if the request is legitimate.  That is, someone has to determine if the act that is claimed has occurred, if the employee is covered for this act, and if so what payment is appropriate. This work can be time-consuming but does not necessarily require highly technical skill to perform. The knowledge of a number of different areas, particularly insurance, is the main concern in this task.   Counseling employees who have been turned down for a claim and showing them why they did not qualify requires good interpersonal skills.

This is one area in which a benefits administrator can show his or her worth to the organization in concrete terms. Proper claims processing and monitoring can save up to 15 percent in benefit costs.²⁹

Communication of Benefits

The employment-exchange model points out that to be considered rewards, benefits must be recognized and perceived as relevant by the employee. The experience of many organizations is that employees are unaware of what benefits the organization offers and not at all aware of the cost of these benefits, even after extensive efforts have been made to inform them.³⁰ Further, although it can be said that employees certainly value benefits,³¹ it is not clear that they desire the particular set of benefits that the organization offers.

Communicating benefits is harder than communicating wage information. Each payday the employee receives feedback regarding wages. But benefits may or may not be visible to the employee over a long time period.  Retirement plans are a good example. To a young person this is something rarely thought about or discussed, so the chances are slight that he or she is aware of the organization's retirement plan program. Further, there is little perceived relevance of a retirement plan to young people; retirement is the least of their concerns.  To complicate matters, many benefits are difficult to explain and retirement plans are among the worst.  The technical language of insurance and retirement plans makes it difficult for employees to understand what they are entitled to, even if they show an interest.

Communicating benefit information takes a planned and continuous approach if employees are to know and understand their benefit package. Some ideas that organizations use are as follows:

1. Utilize the Internet for benefits communications. See www.benefitsreview.com.

2. Utilize the Internet for benefits administration.

3. Make a benefits presentation to all employees in small groups. This can be accomplished by using outside resources such as a benefits expert (consultant or broker) or the supervisor supported by the expert.

4. Have a counseling line and/or hotline for individual questions.

Monitoring Benefits

The field of benefits is changing rapidly.  It is necessary for the organization to keep careful track of what is happening both externally and internally.  The needs and preferences of employees are likely to change because the organization's work force is constantly changing. Surveying employee needs and preferences should be a continuing exercise and not a one-time project. The practices of competition in the labor market need to be monitored on the same basis as they do for wage information. But what has become most complex for the organization to monitor is the changing costs of those benefits provided by outside organizations such as insurance companies.  Organizations that have been monitoring what has happened in this area have begun to develop alternative ways of providing these benefits to employees at a lower or stable cost. Last, legislation in this field is changing every day, and administrators need to examine these acts to see if the organization is meeting legal requirements and taking proper advantage of changes in the law.

SUMMARY

A major continuing change in compensation administration is the increase of benefits as a part of total compensation.  Benefits are a different form of compensation from direct pay. The focus in benefits is the membership model of motivation. Benefits provide a reason to join and remain a member of the organization. Benefits are a wide variety of inducements offered to employees with little in common except that they are not "paid" to the person each payday. This makes terminology and categorization of benefits difficult.

There has been a growth of benefits for a number of reasons. Industrialized society makes it difficult for people to provide themselves with needed protection from the vicissitudes of the economy. Thus, organizations are often seen as having a social responsibility to provide these protections, both to care for their employees and to provide a service to society.  Unions have also found it useful to demand benefits. They see the need to provide protection for their members, and the organization is the group that they can directly affect. Employees, too, are interested in benefits. Tax advantages and cost savings are two reasons, but changes in lifestyle make items like time off more appealing.

In the past, a major problem with benefits has been their disorganized growth.  Organizations are finding that it is becoming more necessary to carefully plan out benefit packages both to optimize their motivational impact and to reduce costs.   The first decision an organization makes is what benefits to offer. Some benefits are required by law, some are bargained for by unions, others are needed to be competitive, and others meet the needs of the employees.  All these must be integrated into the organization's ability to pay. 

The second decision is who is to receive what benefit.  One trend in this area is to involve the employee by instituting a cafeteria benefits plan. In planning benefit programs it is also wise to consider some broader issues of the effects of benefits on the organization, unions, the economy, and society. The way the United States handles employee protection and benefits is peculiarly American.

The administration of benefits is becoming much more important in organizations; staff specialists are assigned to this function. Planning out the program is not the only requirement; control of costs is becoming a major goal. To maximize the impact of benefit plans, organizations are developing sophisticated communication programs to explain to employees the advantages of their benefits. The Internet offers a future of immediate and timely administration and instant and ubiquitous communication.

Internet Based Benefits & Compensation Administration

Thomas J. Atchison
David W. Belcher
David J. Thomsen

ERI Economic Research Institute
Copyright © 2000 - 2009

Library of Congress Cataloging-in-Publication Data

HF5549.5.C67B45 1987 658.3'2 86-25494 ISBN 0-13-154790-9

Previously published under the title of Wage and Salary Administration.

The framework for this text was originally copyrighted in 1987, 1974, 1962, and 1955 by Prentice-Hall, Inc. All rights were acquired by ERI in 2000 via reverted rights from the Belcher Scholarship Foundation and Thomas Atchison.

All rights reserved. No part of this text may be reproduced for sale, in any form or by any means, without permission in writing from ERI Economic Research Institute. Students may download and print chapters, graphs, and case studies from this text via an Internet browser for their personal use.

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