THE BENEFITS PICTURE TODAY

What are your benefits?" Is the first question many applicants ask. Benefit-indirect
financial and nonfinancial payments employees receive for continuing their employment with
the company are an important part of just about every employees compensation. They
Include things like health and life insurance pensions, time off with pay, and child care
facilities.

Benefits are a major expense for most employers. After almost a decade of lit tie or no
growth, private sector employers' benefit costs Jumped J.S% recently possibly indicating a
return to the days when such costs rose rapidly. Benefits as a percentage of payroll are about
41% today. That translates to around) $15.000 in total annual benefits per employee, or close
to $7 per payroll hour. Payments for time not worked represent the biggest chunk of benefits
payments, followed by legally required payments for unemployment compensation,
retirement plan payments, insurance payments, and severance pay.
Most full-time employees In the United States receive benefits. In one survey of about
33 million full-time employees, roughly 89% received paid holidays, 96% got paid vacations,
and 77% received employer-provided medical coverage Similarly, 80% of employees benefit
from some type of employer-supported retirement plan, and about 87% receive life insurance
benefits.
In developing benefits plans, employers must address a number of policy issues. These
include: what benefits to offer; who receives coverage; whether to include retirees in the plan;
whether to deny benefits to employees during initial "probationary" periods; how to finance
benefits; the degree of employee choice in determining benefits; cost-containment
procedures; and how to communicate benefits options to employees.

There are many benefits and various ways to classify them. We will classify them as (1)
pay for time not worked, (2) insurance benefits, (3) retirement benefits, and (4) services. We
start our discussion with pay for time not worked.

PAY FOR TIME NOT WORKED

Pay for time not workedalso called supplemental pay benefitsis the 1,000-pound
gorilla of most benefits plans. It is generally an employer's most costly benefit because of the
large amount of time off that many employees receive. According to a new U.S. Chamber of
Commerce annual survey, paid time off was the most costly company benefit in 1999, at 30%
of total benefits; medical benefits (26%) were the second most expensive benefit.6 Common
time-off-with-pay periods include holidays, vacations, jury duty, funeral leave, military duty,
personal days, sick leave, sabbatical leave, maternity leave, and unemployment insurance
payments for laid-off or terminated employees.
Unemployment Insurance
All states have unemployment insurance or compensation acts. These provide for
benefits if a person is unable to work through no fault of his or her own. The benefits derive
from a tax on employers that can range from 0.1% to 5% of taxable payroll in most states. An
employer's unemployment tax rate reflects its rate of personnel terminations. States have their
own unemployment laws, but they all follow federal guidelines.
Firms aren't required to pay everyone they dismiss unemployment benefits only
those released through no fault of their own. Thus, strictly speaking, a worker fired for
chronic lateness can't legitimately claim benefits. But many managers take a lackadaisical
attitude toward protecting their employers against unwanted claims.

Vacations and Holidays

The number of paid employee vacation days varies considerably from employers to
employers. In the US, the average is about 10 days per year. However, even for the same
employers, long term employees traditionally get more vacation days. Thus, a typical US
company policy might call for:
1.

One week after 6 months to 1 year of service;

2.

Two weeks after 1 to 5 years of service;

3.

Three weeks after 5 to 10 years, of service;

4.

Four weeks after 15 to 25 years of service: and

5.

Five weeks after 25 years of service.

The average number of annual vacation days is generally greater In Industrialized

countries outside the United States. For example, vacation allowances vary from 6 days in
Mexico to 10 days in Japan. 25 in Sweden. 25 in France, anti 33 In Denmark. (On the other
hand, Denmark, France, and several other European countries also have six-dav work weeks.)
In the United States, the number of paid holidays also varies considerably from
employer to employer, from a minimum of about 5 days to 13 or more. The most common
paid holidays include New Year s Day, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day. Other common holidays include Martin Luther King
Jr. Day, Good Friday, Presidents Day, Veterans Day, the Friday after Thanksgiving, the day
before Christmas Day, and the day before New Year's Day.

Sick Leave
Sick leave provides pay to employees when they're out of work due to illness. Most
sick leave policies grant full pay for a specified number of sick daysusually up to about 12
per year. The sick days usually accumulate at the rate of, say, one day per month of service.
Sick leave pay causes difficulty for many employers. The problem is that while many
employees use their sick days only when they are legitimately sick, others use sick leave as
extensions to vacations, whether they are sick or not. In one survey, for instance, personal
illnesses accounted for only about 45% of unscheduled sack leave absences. Family issues
(27%), personal needs (13%), a mentality of and stress (6%) were other reasons cited. While
the figure varies considerably by size of firm, unscheduled absenteeism for all employers
averages about 1.6% of all scheduled work hours. Thus a company with 10 employees and a
40-hour workweek might expect to have employees calling in with unscheduled absences at
the rate of about .016 x 400 or 6.4 hours per week.
Employers have tried several tactics to reduce the problem. Some now repurchase
unused sick leave at the end of the year by paying their employees a daily equivalent sum for
each sick leave day not used. The drawback Is that the policy can encourage legitimately sick
employees to come to work despite their illness. Others have experimented with holding
monthly lotteries in which only employees with perfect monthly attendance are eligible for a
cash prize. Marriott has a program called BeneTrade through which employees can trade the
value of some sick days for other benefits. Others aggressively investigate all absences, for
instance, by calling the absent employees at their homes when they are out sick.
A leave bank of paid time off (PTO) is another option; it basically gives employees a
total figure for all annual time off. For example, one hospital previously granted new
employees 25 days off per year (10 vacation days, 3 personal days, and 12 sick days).

Employees used, on average, 5 of those 12 sick days (as well as all vacations and personal
days). The new PTO policy allowed new employees to accrue 18 PTO days to use as they
saw fit. ("Catastrophic leaves" defined as short-term illnesses causing absences for more
than five consecutive workdays, as well as special absences like jury duty and bereavement
leavewere handled with separate accounts.) The new plan reportedly resulted in substantial
cash savings, including almost $400,000 over three years in lower overtime, and $350,000 in
reduced temporary help.

Parental Leave and the Family and Medical Leave Act

Parental leave is an important benefit. About half of workers today are women, and
about 80% will become pregnant during their work lives.15 Furthermore, many women and
men are heads of single-parent households. Partly as a response, former president Clinton
signed the Family and Medical Leave Act of 1993 (FMLA). Among its provisions, the law
stipulates that:
1.

Private employers of 50 or more employees must provide eligible employees

up to 12 weeks of unpaid leave for their own serious illness, the birth or
adoption of a child, or the care of a seriously ill child, spouse, or parent.

2.

Employers may require employees to take any unused paid sick leave or
annual leave as part of the 12-week leave provided in the law.

3.

Employees taking leave are entitled to receive health benefits while they are
on unpaid leave, under the same terms and conditions as when they were on
the job.

4.

Employers must guarantee employees the right to return to their previous or

equivalent position with no loss of benefits at the end of the leave; however,

the law provides a limited exception from this provision to certain highly paid
employees.
Some employers have found complying with this act somewhat onerous. "We have
found that basically any illness is now covered by the law," said one benefits director.
Another contends that her company can no longer "impose any disciplineeven the
downgrading of attendance ratingsfor absences due to any cause covered by the law."16
Employees also seem to be surprisingly aware of their rights under the act, with over half the
complaints filed with the Department of labor's Wage and Hour Division in some recent
years stemming from the act.17 And courts have found supervisors (not just employers) liable
under the act for improperly preventing workers from exercising their FMLA rights.18

Severance Pay
Many employers provide severance paya one-time payment when terminating an
employee. Severance pay makes sense on several grounds. It is a humanitarian gesture, and
good public relations. In addition, most managers expect employees to give them at least one
or two weeks' notice if they plan to quit; it therefore seems appropriate to provide at least one
or two weeks' severance pay if an employee is being dismissed. Avoiding litigation from
disgruntled former employees is another reason for severance pay. And the Worker
Adjustment and Retraining Notification ("plant closing") Act requires covered employers to
give employees 60 days' written notice (but not severance pay) of plant closures or mass
layoffs.
For whatever reason, severance pay is increasingly common. In one survey of 3,000
HR managers, 82% of responding organizations (ranging from 66% for very small firms to
over 90% for larger firms) reported having a severance policy.23 The reason for the dismissal

affects whether the employee gets severance pay. For example, about 95% of employees
dismissed due to downsizings got severance pay, while only about a third of employers
offered severance in cases of termination for poor performance. About half the employees
receiving severance pay get lump-sum amounts; the other half receive salary continuation for
a time. The average maximum severance is 39 weeks for executives and about 30 weeks for
other downsized employees.24 Severance pay at the rate of one week of severance pay for
each year of service is the policy at about half the firms responding to another survey.25
Supplemental Unemployment Benefits
In some industries, such as automaking, shutdowns to reduce inventories or change
machinery are common, and laid-off or furloughed employees must depend on
unemployment insurance. Some companies pay supplemental unemployment benefits. As the
name implies, these supplement the employee's unemployment compensation, and help the
person maintain his or her standard of living for the time he or she is out of work. They
provide benefits over and above state employment compensation for three contingencies:
layoffs, reduced workweeks, and relocations.

INSURANCE benefits
Most employers also provide a number of required or voluntary insurance benefits,
such as workers compensation and health Insurance.
Workers Compensation
Workers' compensation laws26 aim to provide sure, prompt income and medical
benefits to work-related accident victims or their dependents, regardless; of fault. Every state
has its own workers' compensation law and administrative commission, and some run their

own insurance programs. However, most require employers to carry workers' compensation
insurance with private state-approved insurance companies. Neither the state nor the federal
government contributes any funds for workers' compensation.
How Benefits Are Determined Workers' compensation benefits can be monetary or
medical. In the event of a worker's death or disablement, the person's dependents are paid a
cash benefit based on prior earningsusually one-half to two-thirds the worker's average
weekly wage, per week of employment. In most states, there is a set time limitsuch as 500
weeksfor which benefits can be paid. If the injury causes a specific loss (such as an arm),
the employee may receive additional benefits based on a statutory list of losses, even though
he or she may return to work. In addition to these cash benefits, employers must furnish
medical, surgical, and hospital services as required by the employee.
For workers' compensation to cover an injury or work-related illness, one must only
prove that it arose while the employee was on the job. It does not matter that the employee
may have been at fault; if the person was on the job when the injury occurred, he or she is
entitled to workers' compensation. For example, suppose you instruct all employees to wear
safety goggles when at their machines. One worker does not and experiences an injury while
on the job. The company must still provide workers' compensation benefits. The employment
provisions of the Americans with Disabilities Act (ADA) influence most employers' workers'
compensation procedures. For one thing, ADA provisions generally prohibit employers from
inquiring about an applicant's workers' compensation history, a practice that was widespread
before passage of the act. Furthermore, the ADA makes it more important that injured
employees get back to work quickly or be accommodated if their injury leads to a disability.
Failing to let an employee who is on workers' compensation because of an injury return to
work, or failing to accommodate him or her, could lead to lawsuits under ADA.28

Controlling Workers Compensation Costs Minimizing the number of workers'

compensation claims (and therefore accidents and lost hours) is an important goal for all
employers. While the employer's insurance company usually pays the claims, the costs of the
premiums depend on the number and dollar amount of claims.
In practice, there are several ways to reduce such claims. You can screen out accidentprone workers. You can reduce accident-causing conditions in your facilities- And you can
reduce the accidents and health problems that trigger these claims-for instance, by instituting
effective safety and health programs and complying with government safety standards.
It's also important to get injured employees back on the job as fast as possible, since
workers' compensation costs accumulate as long as the person is out of work. Many firms
have rehabilitation programs that include physical therapy (including exercise equipment);
career counseling to guide injured employees into new, less strenuous jobs; and nursing
assistance to help reintegrate recipients back into your workforce. Employers can also affect
their premiums by selecting insurers based on their level of service and flexibility in
negotiating rates.

HIGH PERFORMANCE INSIGHT Weirton Steel Corporation of Weirton, West

Virginia, established a workers' compensation program to review, contain, and reduce the
costs of workers' compensation. The firm now thoroughly reviews and monitors injury
claims, as well as payout periods and employee recovery times.
For example, Welrton modified its reporting process to allow a more thorough review
of injuries by including independent medical examiners and third-party administrators. UR
must submit accident reports for a ruling within 24 hours of filing, or within three days if
questioned. The firm holds weekly management meetings to review each case. Weirton

established an aggressive Modified Duty Program to return employees to the workplace in a

suitable area. Unique to the program is the Options Rehab Program, in which the injured
person agrees to rehabilitation treatment. The program requires that if the employee needs
surgery, it will occur as soon as possible, followed by prescribed rehabilitation, and a proper
transition back to work. The company is developing a treatment protocol for high-frequency
Injuries such as back strain, knee injuries, and shoulder Injuries. There is also increased
follow-up of employees off work through biweekly physician visits and calls from case
managers.
Weirton's workers' compensation program, with its aggressive, proactive approach
toward case reduction, has reduced the number of cases and produced substantial cost
savings. In the mid-1990's, workers' comp cases dropped from 140 monthly to 77; payouts
dropped from $153,000 monthly to $101,000. The firm expanded its efforts with a "zeroaccidents" program in 2001.33
Hospitalization, Health, and Disability Insurance
Health and hospitalization Insurance looms large in many people's choice of employer,
because such insurance is so expensive. Most employersabout 80% of medium and large
firms and 69% of small firmstherefore offer their employees some type of hospitalization,
medical, and disability insurance; along with life insurance, these benefits form the
cornerstone of most benefits programs.34
Hospitalization, health, and disability insurance helps protect against hospitalization
costs and the loss of income arising from off-the-job accidents or illness. Many employers
purchase the insurance from life insurance companies, casualty insurance companies, or Blue
Cross (for hospital expenses) and Blue Shield (for physician expenses) organizations. Others

contract with health maintenance organizations or preferred provider organizations, which we

discuss below.
Most health insurance plans provide at least basic hospitalization and surgical and
medical insurance for all eligible employees at group rates. Insurance is generally available to
all employeesincluding new nonprobationary ones regardless of health or physical
condition. Most basic plans pay for hospital room and board, surgery charges, and medical
expenses (such as doctors' visits to the hospital.)
Life Insurance
In addition to hospitalization and medical benefits, most employers provide group life
insurance plans. As with health insurance, employees can obtain lower rates in a group plan.
And group plans usually accept all employeesincluding new nonprobationary ones
regardless of health or physical condition.
In many cases, the employer pays 100% of the base premium, which usually provides
life insurance equal to about two years' salary. The employee then pays for any additional
coverage. In some cases, the cost of the base premium is split 50/50 or 80/20 between
employer and employee. In general, there are three key personnel policies to address: the
benefits-paid schedule (the amount of life insurance benefits is usually tied to the employee's
annual earnings), supplemental benefits (continued life insurance coverage after retirement,
and so on); and financing (the amount and percent that the employee contributes).59
Benefits for Part-Time Workers
Until quite recently, most employers ignored their part-time workers, at least in terms
of benefits. That is changing, however. The Bureau of Labor Statistics, which defines parttime work as less than 35 hours a week, says 13.6% of the nation's workforceabout 19
million peoplework part-time. An aging workforce, more phased retirement programs, a

desire to better balance work and family life issues, and more women in the workforce help
explain this phenomenon. In any case, a recent study found that 80% of the firms surveyed
provide holiday, sick leave, and vacation benefits, and over 70% offer some form of health
care benefits to part-time workers.60
RETIREMENT BENEFITS
As the 77 million or so baby boomers born between 1946 and 1964 stampede into
retirement, employers are revising and improving their retirement benefits.61 The first
contingent of baby boomers turns 65 in the year 2011, and many reportedly won't wait that
long to retire; 38% of boomers aged 45 to 52 want to retire by age 55.

Social Security
Most people assume that Social Security provides income only when they are over 62,
but it actually provides three types of benefits. The familiar retirement benefits provide an
income if you retire at age 62 or thereafter and are insured under the Social Security Act.
Second are survivor's or death benefits. These provide monthly payments to your dependents
regardless of your age at death, again assuming vou are insured under the Social Security
Act. Finally, there are disability payments. These provide monthly payments to employees
who become totally disabled (and their dependents) if they work and meet certain
requirements.64 The Social Security system also administers the Medicare program, which
provides a wide range of health services to people 65 or over.
A tax on the employee's wages, shared equally by employees and employers, funds
Social Security (technically, it is called "Federal Old Age and Survivor's Insurance"). In
2001, the employer and employee each paid 7.65% of the employee's gross salary, up to
$80,400. Self-employed individuals paid 15.3% of their taxable income up to $80,400 (less

2% of their self-employed income). "Full retirement age" according to Social Security is

65the usual age for retirement. However, full retirement age is rising: It will soon be 67 for
those born in 1960 or later. President George Bush and Congress are looking at programs that
might allow employees to divert part of what they're now paying into Social Security into
private sector investments.65
Pension Plans
Pensions provide income to individuals in their retirement, and just over half of fulltime workers participate in some type of pension plan at work. However, the actual rate of
participation depends on several things. For example, older workers tend to have a higher
participation rate, and employees of larger firms have participation rates as much as three
times as high as those in small firms.66 Workers earning lower incomes (particularly under
$25,000 a year) are more at risk of receiving little or no pension income, because they
contribute significantly less to pension plans than do workers earning more.67
We can classify pension plans in three basic ways: contributory versus noncontributory
plans; qualified versus nonqualified plans; and defined contribution versus defined benefit
plans.68 The employee contributes to the contributory pension plan, while the employer
makes all contributions to the noncontributory pension plan. There are certain tax benefits
employers derive from contributing to qualified pension plans, such as tax deductions for
contributions; nonqualified pension plans get less favorable tax treatment for employees and
employers.
With defined benefit plans, the employee knows ahead of time the pension benefits he
or she will receive. The defined pension benefit itself is usually set by a formula that ties the
person's retirement pension to an amount equal to a percentage of the person's preretirement
pay (for instance, to an average of his or her last five years of employment), multiplied by the

number of years he or she worked for the company. Defined contribution plans specify what
contribution the employee and employer will make to the employee's retirement or savings
fund.

Pension Planning
Pension planning is complicated, partly because of the many federal laws governing
pensions. For example, companies (and employees) usually want to ensure their pension
contributions are "qualified," or tax deductible, so they must follow the pertinent income tax
codes. The Employee Retirement Income Security Act (ERISA) of 1974 restricts what
companies can, cannot, and must do in regard to pension plans (more on this in a moment). In
unionized companies, the employer must let the union participate in pension plan
administration.
In developing pension plans to meet their unique needs, employers have to consider
several key policy issues:75
Membership requirements. For example, what is the minimum age or minimum
service at which employees become eligible for a pension?
Benefit formula. This usually ties the (defined) pension to the employee's final
earnings, or an average of his or her last three or four years' earnings.
Plan funding. How will you fund the plan? Will it be contributory or noncontributory?
Vesting. Vested funds are the money employer and employee have placed in the
latter's pension fund that cannot be forfeited for any reason. The employees' contributions are
always theirs, of course. However, until the passage of ERISA, many pension plans didn't
vest the employer's contribution till the employee retired. So you could have worked for a

company for 30 years and been left with no pension if the company went out of business 1
year before you were to retire. That generally can't happen today.76

Pensions and the Law

Passage of ERISA was a pivotal step in protecting the pensions of workers and
stimulating the growth of pension plans.77 Today, under ERISA, participants in pension
plans must have a nonforfeitable right to 100% of their accrued benefits after five years of
service; as an alternative, the employer may choose to phase in vesting over a period of three
to seven years. Under the Tax Reform Act of 1986, an employer can require that an employee
complete a period of no more than two years' service to the company before becoming
eligible to participate in the plan. However, if you require more than one year of service
before eligibility, the plan must grant employees full and immediate vesting rights at the end
of that period.78
ERISA established the Pension Benefits Guarantee Corporation (PBGC) to oversee and
insure pensions should a plan terminate without sufficient funds to meet its vested
obligations.79 However, the PBGC guarantees only defined benefit plans, not defined
contribution plans. Furthermore, it will only pay an individual a pension of up to about
$27,000 per year. This may seem like a lot, but might not be to, say, an airline pilot who
retired expecting a pension of $70,000 per year.80
Pension Trends
Many firms today, faced with the need to reduce their workforces, are offering earlyretirement windows and other voluntary separation arrangements.

Portability Today's needs for flexible staffing and the realities of ongoing corporate
restructurings are also prompting employers to make their pension plans more portable. For
example, Duracel International redesigned its pension plan to make it easier for employees to
take their retirement income when they leave, and roll it over into a new employer's savings
plan.87 Employers often* do this by switching from defined benefit to defined contribution
plans, since the former are more appropriate for employees who plan to stay with the firm
until retirement. Another approach is to allow workers who leave the firm before retirement
to receive initial benefits at a younger age.88
Cash Balance Pension Plans These are defined benefit plans for federal tax purposes,
but they work differently. In a typical defined benefit plan, the employer multiplies the
employee's average pay over the last few years of his or her employment by a predetermined
multiple, and the result represents the person's annual retirement income. This approach tends
to favor older employees (whose income is often higher and who have been with the firm for
a number of years). Younger employees who may not be planning to stay with the firm their
entire careers may prefer cash balance plans.

FLEXIBLE BENEFITS PROGRAMS

"Variety is the spice of life," the saying goes. This applies very well to employee
benefits, since the benefits one worker finds attractive may be unattractive to another. As a
result there is a trend toward building flexibility into benefits programs by letting employees
choose the benefits options they prefer.
RESEARCH INSIGHT One classic study illustrates employees' preferences for
various benefits.134 The researcher mailed questionnaires listing seven possible benefit
option to 400 employees of a Midwestern public utility company.

The Cafeteria Approach

Because employees do have different preference for benefits, more employers today let
employees individualize their benefits plans. The "cafeteria" approach is the main way to do
this. (The terms flexible benefits plan and cafeteria benefits plan are generally used
synonymously.) A cafeteria plan is one in which the employer gives each employee a benefits
fund budget, and lets the person spend it on the benefits he or she prefers, subject to two
constraints. First, the employer must carefully limit total cost for each benefits package.
Second, each benefits plan must include certain required itemsfor example, Social
Security, workers' compensation, and unemployment insurance. New IRS regulations should
make cafeteria plans more attractive, by making them more flexible. Thus, employees can
now make midyear changes to their plans if, for instance, their dependent care costs rise and
they want to divert more contributions to this expense.137
Cafeteria plans come in several varieties. Flexible spending accounts let employees pay
for certain benefits expenses (such as dental care) with pretax dollars. Periodically,
employees can elect the amount of salary reduction dollars they wish to allocate to various
element $ in their plans. Core plus option plans establish a core set of benefits (such as
medical insurance), which are usually mandatory for all employees. Beyond the core,
employees can then choose from various benefits options.138

Flexible Programs: Pros and Cons

Flexible benefits programs have pros and cons.142 Flexibility is of course the main
advantage: Employees can choose the package that suits them best, and the firm can adapt to
workers' changing needs. Flexible programs also make it cheaper to introduce new benefits,
since the employer doesn't have to lock them in for all employees. However, employees may

make bad choices and find themselves not covered for emergencies, and the administrative
costs of such plans can be burdensome. Employers have to price and periodically update each
employee's package, so even a medium-sized firm should computerize the administration of
its plan.143 Various benefits firms have therefore developed computerized aids, as explained
next.

SUMMARY
1.

Financial incentives are usually paid to specific employees whose work is

above standard. Employee benefits, on the other hand, are available to all
employees based on their membership In the organization.

2.

There are four basic types of benefits plans: pay supplements, insurance,
retirement benefits, and services.

3.

Supplemental pay benefits provide pay for time not worked. They include
unemployment insurance, vacation and holiday pay, severance pay, and
supplemental unemployment benefit.

4.

Insurance benefits include workers' compensation, group hospitalization,

accident and disability insurance, and group life insurance.

5.

Retirement benefits include Social Security and pension plans. Social Security
does not cover just retirement benefits but survivors and disability benefits as
well. Pension plans include defined benefit plans, defined contribution plans,
deferred profit sharing, and savings plans. One of the critical issues in pension
planning is vesting. ERISA basically ensures that pension rights become
vested and protected after a reasonable amount of time.

6.

Most employers also provide benefits in the form of employee services. These
include food services, recreational opportunities, legal advice, credit unions,
and counseling.

7.

Surveys suggest two conclusions regarding employees preferences for

benefits. First, time off seems to be the most preferred benefit. Second, the
employees age, marital status, and sex clearly influence choice of benefits.
This suggests the need for individualizing the organization's benefits plans.

8.

Flexible benefits plans, also called the cafeteria approach, allow the employee
to put together his or her own benefits plan, subject to total cost limits and the
inclusion of certain non optional items. Many firms have installed cafeteria
plans; they require considerable planning and computer assistance.