Compensation

Discussion of the effects of employee benefits on cost and workforce quality

I.       Introduction

Most benefits are a form of non-taxable income to employees, providing them with such advantages as retirement provisions, paid personal time, insurance and health protection and various other employee services. Benefits are to increase an employee’s feeling of security, happiness and wellbeing. The aim of benefits is to attract better, more skilled employees and be competitive in local market for most positions.

The benefits provided can range from bonuses for performance to different insurances to discounts or even material gifts. It depends on the company, market and employee structure and needs which benefits will provide the best effects on performance and company culture. Benefits can also be used to increase employee loyalty, by providing more than do others, thus relieving their company of costs associated with finding a replacement.

Some benefits may seem inadequately expensive while others might be more effective in achieving the objective with less cost. However, it is important not to look at just the obvious price, but also at the other costs associated with providing or not providing a benefit. The hidden cost of not providing a benefit is the cost of high turnover, the cost of lost productivity or the costs of providing other substitute benefits.

The workforce quality goes up with the quality of benefits provided. The more and the better benefits an organization provides, the more skilled workforce it can attract and retain. If education is provided as a form of benefit, it can be the means of having higher skilled workforce without the need for recruitment (4).

I.             What are benefits

Benefits are extra services provided by an employer to his employees, they are an indirect form of the total compensation to an employee (5). Benefits include mostly health insurance, paid time from work and retirement income, but they can vary into a wide range of other services. Most companies offer at least some form of benefits as it is more cost-effective than giving the employees cash instead.

Benefits were first introduced during the World War II, when a shortage of workers forced companies to look for new ways of attracting workers. Since they could not increase their wages, which were controlled by the government, together with labor unions the companies decided to offer inducements not controlled by the government. They offered to pay employees’ medical bills, provide insurance and subsidize cafeterias. Later on, tax policies were set to aid the development of benefits. Benefits became deductible expenses for the employer and are not subject to tax for the employee. Most organizations today in the US offer some kind of benefits.

The objective of benefits is to accomplish external competitiveness along with cost effectiveness. Benefits must also comply with legal regulations and should be designed to meet individual employees’ needs and preferences (5). When choosing a benefit package for an organization, the organization’s objectives and strategies must be reflected in those chosen benefits. Apart from giving the employee something extra for working, the employee should feel that his employer cares for his well-being, and with that in mind he chooses the benefits to propose.

Benefits offered differ by the size of the company, its location, strategies and objectives. Large businesses can usually afford to provide more expensive benefits, especially full medical coverage or the like. Smaller businesses have to consider more closely what to offer, as each additional cost affects the business. They may therefore choose to pay only a percentage of the medical costs as a benefit. Location of the workforce of an organization affects its needs; therefore different benefits would have to be provided in New York, USA, than in S±o Paulo, Brazil.

The most widely offered benefits include pension plans (401(k) in the USA) and retirement benefits, insurance (disability, life, accident), medical and dental coverage, monetary bonuses, paid time off, flexible scheduling arrangements, training, and child care assistance. These various benefits and their impact on the organization will be discussed in the following chapters.
Benefits should aim to increase the employee’s sense of well-being, help achieve balance in his life. As Brian G. Dyson said, today’s employees look more for balance than for money in their lives, even though money still plays an important role.

“Imagine life as a game in which you are juggling some five balls in the air. You name them - work, family, health, friends and spirit - and you're keeping all of these in the air. You will soon understand that work is a rubber ball. If you drop it, it will bounce back. But the other four balls - family, health, friends and spirit - are made of glass. If you drop one of these, they will be irrevocably scuffed, marked, nicked, damaged or even shattered. They will never be the same. You must understand that and strive for balance in your life.”

--Brian G. Dyson

President and CEO, Coca-Cola Enterprises during his speech at the Georgia Tech 172nd Commencement Address Sept. 6, 1996 (7)

I.             Health Benefits

Health benefits are the most widely offered type of benefits. These benefits can be fully paid for by the employer or can be just subsidized at a set amount or percentage of the actual costs. Health care is the biggest and most important part of the benefits package. Most businesses, according to O’Connor (6), start with health care, then follow it with dental care and then turn to other benefits. Also health insurance, life insurance and disability insurance are important for an employee to give him a sense of security.

A.   Medical Expenses Coverage
Paying for medical expenses of employees is one of the most expensive benefits; however, it is the most widely offered one (in USA). With rising health care costs, employees find it very appeasing to have the opportunity to share the costs with their employer, or to have all of the costs paid for. Aside from medical care, dental care, vision care and prescription drugs are often covered as well.

As with other benefits, this coverage can be fully subsidized, or an agreement on how much the employer will pay can be made. The expense of providing medical coverage makes employers nervous, as the costs are getting higher every year. Therefore, employers may eventually stop providing such coverage and, instead, give their employees the money to make their own decisions about insurance. However, for now such a change would be impractical due to tax alleviations and other policies. (6)

Recently, changing lifestyle has brought pressure on extending benefits to domestic partners. According to a study by the Hewitt Associates, 22% of companies were in 2000 offering such benefits for domestic partners. Moreover, 35% of those that didn’t offer these benefits were considering increasing the range of benefits to domestic partners. (For a graph of costs for domestic partners, please see Appendix III, figure 2.)

B.   Life Insurance
Workers want to have a long-term feeling of security, which can be given to them through a life insurance. When the insurance is paid for by the employer, a lot of expenditures are saved for the employee and the cost is lower than if the employee had to pay himself. It is said that a satisfied worker is a good worker, and the same holds with an employee who can feel more secure about his/her future.

Even though insurance is not as costly as medical coverage, it can be hard to fully pay for by smaller companies. Therefore the cost can be shared with the employee.
C.   Disability and Major Illness Insurance
Apart from providing long-term security, income protections can provide a regular and dependable income for an employee who is too ill or disabled to work. Employees thus feel they are protected against the financial effects of an illness or injury, and this increases their commitment to the organization. The major illness insurance is often grouped with other employee benefits, such as Life Assurance or Income Protection. (10)

Even though the costs of health benefits are high, benefits are a major factor in attracting and retaining high-caliber staff. Since the commitment and loyalty of employees is of high importance, providing even more costly medical health care can prove vital for the business. Also, providing a benefits package which includes both medical coverage and life insurance through some programs can save money. The city of New York, for example, has created several medical packages to help the employers and employees cope with the costs. (6)
I.            Monetary Bonuses and Paid Time Off

According to Taylor, “Time, not money, seems to be the more precious commodity.” (9) Taylor was asking his audience what they would rather receive- wage rise, more free time or one month sabbatical, and just 20% responded to the higher wage. (These people spent on average more than 9 hours a day working.) However, even though priorities of people are changing, and they want more from life than just work, money still remains one of the best motivators and attracting aspects of a job.

A.   Monetary bonuses
Money being one of the best ways of attracting people, it is a good idea to include extra pay as a bonus. This could be for additional assignments, swift completion of task, perfect attendance, extreme customer satisfaction, extra working time or long-time employment. Even wage could be set based on performance, with a set base and variable add-ons. Monetary bonuses, however, can get really costly, as the cost is always clear to the employees and an employer can not make it look better than it is, as is possible with other benefits. With uncertainties about the ability to pay a set sum, profit sharing can be introduced. It both gives the employees more money, and motivates them to work better, as their benefit depends on their performance.

B.   Paid Time Off
Most employees require some time off from their work for which the employer will pay. These include vacations, sick leave and personal time away from work. These times are used for the employee to rest and find new energy to do his/her work. Several studies showed that a person who is relaxed will have better working results. For this purpose vacation times were introduced.

Sick leave is important to help ill employees cure and prevent the illness from spreading (and thus prevent losses in productivity). Sick leave is a necessary benefit for all employees. In terms of money, paying for one person’s sick leave is cheaper that having to find substitutes if more people got sick and were away from work.

To cut costs, some companies have decided to combine sick leave, personal time, and vacation into one “unileave.” (8) This creates more freedom over the use of their time for employees and helps regulate time-off abuse.

If a company offers educational benefits (as many do, paying or subsidizing the education costs) it usually will offer paid time off to study. It also may have a policy of giving studying employees a day off before examinations, or at least a few hours off. Even though this benefit is quite costly, it will pay off in a better educated workforce and therefore higher profits.

C.    Bereavement Leave
Many companies choose to offer paid leave when a death occurs in the employee’s immediate family. Up to four days may be offered, but the amount varies with the size of the company, location and specialization. The meaning of this leave is to give employees space to come over the emotional shock, and thus be in a better mental state when he/she comes back to work. Offering this type of time off might significantly reduce on-job mistakes from the emotional shock.

I.           Retirement benefits

Retirement benefit plans provide employees with a guaranteed retirement income. The earnings from the benefit are determined by the employee’s length of service, pre-retirement earnings and retirement age. Offered employer-sponsored retirement plans can be in general categorized as defined benefit and defined contribution. Under defined benefit, the employer will pay a specified amount to retirees based on length of service and retirement-age average income. In defined contribution the employer makes a set contribution to an employee’s savings, and the employee does not receive a sum known in advance. The most often used defined contribution retirement plan in USA is a so called 401(k) plan. It allows employees the make pre-tax contributions, which go to a savings account and are invested to earn an income for the employee. Employers often make an equal or partial contribution for the employee.

Under the 401(k) plan employees can choose into how many investments they want to put their money. Appendix IV, Figure 4, shows the distribution of investment choices among full-time employees in private industry in 2000.

The cost if providing retirement benefits depends on the agreement with employees, as there can be a high employer contribution to the plan, but the employer can also provide only a few percent of the employee’s payment.
I.            The Cost Of Providing Benefits

There has been a slow growth of the cost of benefits in the last years. On average, employee benefits costs range from 18 to 28 % of total salary cost, therefore any change in the cost of benefits would significantly affect compensation costs. According to Employee Benefit News (2), in 2001 benefits costs rose 5% in private industry, while compensation costs grew only 4.2%. (For a graph of rising benefits costs, and costs of providing benefits per employee, see Appendix III.) The largest rise in cost was marked in insurance, medical care and prescription drugs. Despite this rise, employers continue to increase their payments instead of asking more from their employees. Thus they are trying to keep their strategy of attracting new workers and retaining current ones.

“It is total compensation costs that really matter, because as benefit costs go up, employers economize in other areas,” economist Gordon Richards at the National Association of Manufacturers in Washington, D.C., says. “They reduce wage increases or hire fewer new employees.” (2) However, if unemployment rose, employers could pass more of the cost on to workers without fear of worse work force.

There are basically two ways of providing benefits- offering each employee the same benefit package, or offering a cafeteria plan, in which a base core of benefits is given and then the employee can choose what benefits he wants to add to his package. Concerning cost, the cafeteria plan provides more ways how to save money. It allocates a certain amount of credits to each employee, who can then use them to purchase additional benefits. However, purchasing benefits this way allows the employer to offer less than under a traditional plan, yet leaving the employees satisfied that they have chosen what they believe are the best benefits for them.

I.            Conclusion

In a modern competitive labor market, attracting the best available employees for an organization can prove quite hard. Benefits were introduced as a way of achieving this purpose. Most organizations nowadays provide some form of benefits, whether it is medical coverage (as most popular in USA) or subsidized food tickets (as most widely known benefit in Slovakia). Even if benefits may seem expensive for the employer, the cost is returned in higher workers’ productivity, job satisfaction and company loyalty.

Benefits can be offered as a package to all employees, or in a cafeteria plan, where employees can choose which benefits they want. If a company wants to seem more concerned with employee satisfaction, and also want to cut some costs on benefits, it might choose the cafeteria plan. However, most large US companies still choose to offer an unchangeable benefit package.

There has been a rise in the cost of benefits, mainly due to an increase in the cost of medical coverage. However, this increase is slightly lower than the increase in total compensation, and therefore employers needn’t worry about the cost of benefits getting out of control. Still, if an employer thinks that the costs are too high, he can ask employees to cover part of these costs, or can choose to offer benefits based on the workers’ productivity and total profit of the organization (profit-sharing).

The overall positive impact of benefits is higher than the costs, thus making employee benefits a must-have for an organization which wants to retain and attract high-quality workforce. There is a variety of employee benefits to be offered, the companies just have to choose which will serve their human resources strategy best.

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