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Employee Benefits

Employee Benefits. © Nancy Brown Johnson, 2005. Typical Benefits. Applied Signal Technology - Employee Benefits. Benefits Are:. Driven by tenure & entitlement Difficult to reward factors such as teamwork Not flexible Difficult to change to reflect priorities

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Employee Benefits

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  1. Employee Benefits © Nancy Brown Johnson, 2005

  2. Typical Benefits • Applied Signal Technology - Employee Benefits

  3. Benefits Are: • Driven by tenure & entitlement • Difficult to reward factors such as teamwork • Not flexible • Difficult to change to reflect priorities • Difficult to use strategically • cannot tailor to fit organizations needs • Does not tend to motivate

  4. So why do firms give benefits? • Legal Compliance • Tend to become Institutionalized & Expected • Basic level of Employee Protection • Tax advantages • Group rate advantages

  5. Benefits Growth 41.2 42.0 37.2 37.6 Percentage 37.9 40% 35.5 30.0 30% 21.5 20% 17.0 10% 3.0 55 65 75 86 90 95 98 00 03 1929 Chamber of Commerce Survey Results IRWIN • a Times Mirror Higher Education Group, Inc., company, 1997

  6. Reasons for Growth • New Deal legislation • Wage and price controls • -WW II • Inflationary Benefit Costs

  7. Legally Mandated Benefits Social Security About 8% employer and employee tax on wages Additional Medicaid tax of 1.45% President’s proposal Counter reactions Unemployment Compensation Experienced based tax Eligibility: work 1 year - not on strike, quit or fired for cause Workers Compensation Disability,medical care, death benefit & rehabilitation Experienced based tax Family and Medical Leave Act IRWIN • a Times Mirror Higher Education Group, Inc., company, 1997

  8. Benefit Planning Issues • What is the role of benefits in compensation? • Attraction, Retention, Motivation • External Competitiveness • Cost control

  9. Private Insurance • Health • Cobra must continue • Trend is for employers to shift more of cost to employees • Life • Short & Long Term Disability • Nursing home

  10. Health Care Source: Kaiser Family Medical Foundation, 2002.

  11. Retirement • Defined Benefit • retirement income level is specified • employer assumes risk • Defined Contribution • amount contributed to retirement defined • employee assumes risk • Retirement confidence survey IRWIN • a Times Mirror Higher Education Group, Inc., company, 1997

  12. Defined Benefit Expected Present Value of Pension Assumes Pension=500*years of service 1. Benefit value=0 if quits, the day starts 2. Benefit value=0 if works until death Value 30 70 90 Retirement Age

  13. Defined Contribution Expected Present Value of Pension Expected Pensions do not depend upon number of years left in person’s life Benefits keep growing Value 70 90 30 Retirement Age

  14. So What is the Incentive to Retire? • Defined benefit plan- • around 67 in the example where the gains to retirement exceed gains to working • Defined contribution plans • incentive keeps working • How do you encourage workers to retire? • cash by out • defined benefit plan

  15. Vesting • Military-no pension until 20 years of service • Separations high at beginning but non-existent at 17-19 years of service, then very high again at 20 years Annual Pension Benefits 20 Years of Service

  16. ERISA (1974) • funding • vesting • communication • portability-values do not change when employer changes

  17. Value of Savings at 65 (Millions of Dollars) Value of savings for different portfolios 1.00 $837,434 0.75 It pays to save early and take some risk 0.50 Savings Calculator $357,003 0.25 $214,957 $128,253 31-39 21-29 31-39 21-29 Investment portfolio (60% stocks, 30% bonds, 10% cash) IRWIN Investment portfolio of 100% cash(money market ) • a Times Mirror Higher Education Group, Inc., company, 1997

  18. Payment for Time Not Worked • Vacations • not mandated in US • 30 days mandatory in Europe • share in work • Japanese work more hours • Holiday Pay • Sick Leave: no fault system • Family & Medical Leave

  19. Paid Time Off • Paid leave makes workers take time that they might not choose to take • Option pay higher wages and let the workers decide if they want to work

  20. Why do firms give paid time-off? • Banks to find out what is going on? • Team production: to get everyone synchronized • Rest to be more productive

  21. Average Hours Worked in Manufacturing Annual Hours 3000 2080 1912 2000 1771 1667 1000 United States Japan France Germany Source: U.S. Chamber of Commerce Research Center, Employee Benefits 1990 (Washington DC: U.S. Chamber of Commerce, 1991).

  22. Employee Benefits in 1993 by Category Medical & other insurance Payment for time not worked 25.2% 28.3% Benefits as % of payroll equals 41.3% 16.0% Retirement plans 21.1% Legally required Paid rest periods (5.6%) Miscellaneous (3.8%) Source: Adapted from the U.S. Chamber of Commerce Research Center, Employee Benefits (Washington,DC: U.S. Chamber of Commerce), 1991, 1994.

  23. Managing Benefits • Survey & Benchmarks • Cost control • managed care • co-insurance • HMO or PPO • Workforce Demographics • Communicating with Employees

  24. Wages v. Benefits • Value -the amount an individual is willing to pay for a good or service • if price is too high, the worker wouldn’t buy • Worker may be willing to pay more for the benefit than it costs (e.g., group rates, taxes) • Willingness to trade wages for benefit • Salary = 55,827-1836(Health Plan) • Salary with health plan $53,991

  25. Employees Undervalue Benefits • Unaware of costs • Every benefit does not suit every worker

  26. Flexible Benefit Plans (Cafeteria) • Workers get more value • Helps make employees more aware of benefit costs • Addresses different employees needs • Maybe reduce some costs for benefits not needed • Increased design and administrative costs

  27. Benefits & Sorting • The benefit package signals the type of worker • life insurance-older worker • day care - family oriented worker • tuition - worker willing to get education • Cafeteria Plan • weaker signal • Adverse Selection • health insurance would attract sicker families • these people apt to be less productive

  28. Social Traps Some benefits may hurt people intend to help Examples: Work/family benefits Help to recruit women with families May hurt women’s career paths Insurance May not hire sicker employees Drive up insurance costs

  29. Benefits Can be Made More Effective • Cost sharing • Aggressive Cost Management • Engaging Employees in Benefit Choices • Target specific benefits to make workforce more productive • childcare, wellness, employee assistance

  30. Benefit Summary • Benefits usually do not motivate • Usually viewed as entitlement • Benefits may help attraction and retention • Often undervalued by employees • Communication important in the process

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