Human Resource Management

Resources: Ch. 11 & 12 of Managing Human Resources, Ch. 9 & 10 of Human Resource Management, the InterClean Scenario, and Employee Profiles

Consider the following scenario:

Benefits, Nonfinancial Compensation, and Other Compensation Issues

Chapter Objectives

After completing this chapter, students should be able to:

1. Define benefits.

2. Describe mandated (legally required) benefits.

3. Explain the various discretionary benefits.

4. Describe customized benefit plans.

5. Explain premium pay.

6. Explain health care legislation.

7. Describe the components of nonfinancial compensation.

8. Describe the job itself as a nonfinancial compensation factor and job characteristics theory.

9. Describe the job environment as a nonfinancial compensation factor.

10. Describe workplace flexibility (work-life balance) factors.

11. Describe the concepts of severance pay, comparable worth, pay secrecy, and pay compression.

HRM in Action: Nontraditional Benefits

Regardless of economic conditions, it seems organizations are continually competing for top caliber employees. Although benefits may not serve as strong motivators of performance, they are obviously important in attracting and retaining these desired individuals. Among numerous unique benefits offered by some firms are the following:

· Lake Zurich–based New Age Transportation, Distribution and Warehousing Inc., handed out pedometers and promised to pay a dollar for every mile employees walked, plus more for losing weight. One employee received a check for $1,200. 1

· Chicago branding agency Bamboo Worldwide Inc., gives employees working vacation days, when they can be out of the office but must check e-mail and voice mail twice during the day. 2

· At Goldman Sachs, employees get 52 hours of paid volunteer time each year.

· At Fannie Mae, employees receive a healthy-living day off and a day of home-purchase leave.

· At Starbucks, even part-timers get health insurance, stock options, and tuition reimbursement as well as a free pound of coffee weekly.

· At AFLAC, the firm’s 32-acre campus has a YMCA fitness center, acute-care clinic, walking trails, child-care center, and a duck pond. Twelve weeks of paid maternity/paternity leave are available for eligible staff.

· At Colgate-Palmolive, new parents get a three-week paid leave on top of regular disability time off. On-site banking, a travel agent, and a film-processing center make errands easier and intramural sports leagues contribute to the fun.

· At Ernst & Young, the company provides a concierge service. 3

· At Communicorp, in Columbus, Georgia, the company has two on-site child-care centers offering infant care, kindergarten programs, after-school programs, and evening services on Saturdays. 4

· At SRP in Arizona, the nation’s third-largest public power and water utility, the company offers its employees identity theft services to educate them about protecting their identity and help them restore their identity and credit after a theft. SRP recently began offering services to its 4,500 employees after noticing workers were contacting its security services weekly for help in dealing with stolen credit cards and lost wallets. Identity theft services cut down on lost productivity and gave employees peace of mind. 5

This chapter begins  by describing some nontraditional benefits, and benefits as indirect financial compensation. A discussion of mandated and voluntary benefits follows. Topics related to health care, life insurance, retirement plans, disability protection, employee stock option plans, supplemental unemployment benefits, and employee services are then discussed. Premium pay and legislation concerning benefits are presented next, and the factors involved in nonfinancial compensation are then described. Topics related to the job itself as a total compensation factor, job characteristics theory, and the job environment as a total compensation factor are then presented, followed by a discussion of factors that are involved in workplace flexibility (work-life balance) and concepts regarding severance pay, comparable worth, pay secrecy, and pay compression. This chapter concludes with a Global Perspective entitled “China’s Work Week.”

Benefits (Indirect Financial Compensation)

1 Objective

1. Define benefits.

Most organizations recognize that they have a responsibility to their employees to provide insurance and other programs for their health, safety, security, and general welfare (see Figure 10-1). These programs, called benefits, include all financial rewards not included in direct financial compensation. Benefits generally cost the firm money, but employees usually receive them indirectly. For example, an organization may spend several thousand dollars a year as a contribution to the health insurance premiums for each employee. The employee does not receive the money but does obtain the benefit of health insurance coverage. This type of compensation has two distinct advantages: (1) it is generally nontaxable to the employee and (2) the cost of some benefits may be much less for large groups of employees than for individuals.

Figure 10-1 Benefits in a Total Compensation Program

As a rule, employees receive benefits because of their membership in the organization. Benefits are typically unrelated to employee productivity; therefore, although they may be valuable in recruiting and retaining employees, they do not generally serve as motivation for improved performance. Legislation mandates some benefits, and employers voluntarily provide others.

According to the U.S. Bureau of Labor Statistics, benefits account for nearly 30 percent of employers’ total compensation costs, but over the past decade, the change in benefits costs has outpaced the change in the cost of wages and salaries. 6 U.S. businesses are paying an average of $7.40 in benefits for each hour their employees work. 7 The cost of the health care benefit alone is estimated at $8,424 annually per person. 8 The magnitude of this expenditure no doubt accounts for the less frequent use of the term fringe benefits. In fact, the benefits that employees receive today are significantly different from those of just a few years ago. As benefit dollars compete with financial compensation, some employers are moving away from paternalistic benefits programs. They are shifting more responsibilities to employees as with 401(k) retirement plans (discussed later). However, in a competitive labor market, many firms are careful to provide desired benefits to attract and retain employees with critical skills.

Mandated (Legally Required) Benefits

2 Objective

1. Describe mandated (legally required) benefits.

Employers provide most benefits voluntarily, but the law requires others. These required benefits currently account for about 10 percent of total compensation costs. They include Social Security, workers’ compensation, unemployment insurance, and family and medical leave. The future comparative importance of these benefits will depend on how the United States deals with rising health care costs and with long-term custodial care for elderly citizens.

Ethical Dilemma: A Poor Bid

You are vice president of human resources for a large construction company, and your company is bidding on an estimated $2.5 million public housing project. A local electrical subcontractor submitted a bid that you realize is 20 percent too low because labor costs have been incorrectly calculated. It is obvious to you that compensation benefits amounting to over 30 percent of labor costs have not been included. In fact, the bid was some $30,000 below those of the other four subcontractors. But, accepting it will improve your chance of winning the contract for the big housing project.

What would you do?

Social Security

The Social Security Act of 1935 created a system of retirement benefits. The Act established a federal payroll tax to fund unemployment and retirement benefits. It also established the Social Security Administration. Employers are required to share equally with employees the cost of old age, survivors’, and disability insurance. Employers are required to pay the full cost of unemployment insurance.

Subsequent amendments to the Act added other forms of protection, such as disability insurance, survivors’ benefits, and, more recently, Medicare. Medicare spending per beneficiary has doubled in real terms in the past two decades and as baby boomers become eligible, the costs will really escalate. Increased costs have resulted from greater use of post–acute care services such as skilled nursing, home health care, and rehabilitation facilities. Medicare’s financial outlook has deteriorated dramatically over the past five years and is now much worse than Social Security’s. 9

Disability insurance protects employees against loss of earnings resulting from total incapacity. Survivors’ benefits are provided to certain members of an employee’s family when the employee dies. These benefits are paid to the widow or widower and unmarried children. Unmarried children may be eligible for survivors’ benefits until they are 18 years old. In some cases, students retain eligibility until they are 19. Medicare provides hospital and medical insurance protection for individuals 65 years of age and older and for those who have become disabled.

Although employees must pay a portion of the cost of Social Security coverage, the employer makes an equal contribution and considers this cost to be a benefit. The present tax rate is 6.2 percent for the Social Security portion and 1.45 percent for Medicare. The total tax rate of 7.65 percent is applied to a maximum taxable wage of $90,000. The rate for Medicare applies to all earnings. Approximately 95 percent of the workers in this country pay into and may draw Social Security benefits. The Social Security program currently is running a surplus but the retirement of the 77-million-member baby-boom generation is looming. Unless Congress makes changes by 2041, the program will have used up its surplus and will no longer be able to pay full benefits. 10

Beginning with employees who reached age 62 in 2000, the retirement age increases gradually until 2009, when it reaches age 66. After stabilizing at this age for a time, it will again increase in 2027, when it reaches age 67. These changes will not affect Medicare, with full eligibility under this program holding at age 65.

Unemployment Compensation

Unemployment insurance provides workers whose jobs have been terminated through no fault of their own monetary payments for up to 26 weeks or until they find a new job. The intent of unemployment payments is to provide an unemployed worker time to find a new job equivalent to the one lost without suffering financial distress. Without this benefit, workers might have to take jobs for which they are overqualified or end up on welfare. Unemployment compensation also serves to sustain consumer spending during periods of economic adjustment. In the United States, unemployment insurance is based on both federal and state statutes and, although the federal government provides guidelines, the programs are administered by the states and therefore benefits vary by state. A payroll tax paid solely by employers funds the unemployment compensation program.

Workers’ Compensation

Workers’ compensation benefits provide a degree of financial protection for employees who incur expenses resulting from job-related accidents or illnesses. As with unemployment compensation, the various states administer individual programs, which are subject to federal regulations. Employers pay the entire cost of workers’ compensation insurance, and their past experience with job-related accidents and illnesses largely determines their premium expense. These circumstances should provide further encouragement to employers to be proactive with health and safety programs, topics discussed in Chapter 11.

Family and Medical Leave Act of 1993 (FMLA)

The Family and Medical Leave Act applies to private employers with 50 or more employees and to all governmental employers regardless of number. The FMLA provides employees up to 12 weeks a year of unpaid leave in specified situations. The overall intent of the Act was to help employees balance work demands without hindering their ability to attend to personal and family needs. FMLA rights apply only to employees who have worked for the employer for at least 12 months and who have at least 1,250 hours of service during the 12 months immediately preceding the start of the leave. The FMLA guarantees that health insurance coverage is maintained during the leave and also that the employee has the right to return to the same or an equivalent position after a leave.

Discretionary (Voluntary) Benefits

3 Objective

1. Explain the various discretionary benefits.

Although the law requires some benefits, organizations voluntarily provide numerous other benefits. 11 These benefits usually result from unilateral management decisions in some firms and from labor/management negotiations in others. Further, an employee’s desire for a specific benefit may change. For instance, with the soaring gas prices has come a desire for commuter benefits, such as employers paying for employees to use public transit and van pools. 12 Major categories of discretionary benefits include payment for time not worked, health care, life insurance, retirement plans, employee stock option plans, supplemental unemployment benefits, and employee services. An example of the wide range of discretionary corporate benefits may be seen inFigure 10-2.

Figure 10-2 An Example of a Corporation’s Benefit Program

Personal Benefits:
	Medical Plans: Two options as well as various HMOs are available.
	Dental Plans: Two options as well as various Dental Maintenance Alternatives (DMAs) and the MetLife Preferred Dentist Program (PDP) are available.
Work and Personal Life Balancing:
	Vacation: 1 to 4 years service—10 days per year
			5 to 9 years service (or age 50–59)—15 days
			10 to 19 years service or age 60 and over—20 days
			20 years or more—25 days
	Holidays: 12 days per year (6 observed nationally; other 6 vary with at least one personal choice).
	Life Planning Account: $250 of taxable financial assistance each year, with certain conditions.
	Flexible Work Schedules, Telecommuting, and Work Week Balancing: (with local management approval).
Capital Accumulation, Stock Purchase, and Retirement:
	401(k) Plan: Employees may contribute up to 12 percent of eligible compensation, which is matched 50 percent on the first 6 percent.
	Stock Purchase Plan: Employees may contribute up to 10 percent of eligible compensation each pay period for the purchase of company stock (pay 85 percent of average market price per share on date of purchase).
	Retirement Plan: Competitive, company-paid retirement benefit plan with vesting after 5 years of continuous service.
Income and Asset Protection: Some of the plans offered include:
	Sickness and Accident Income Plans
	Long-Term Disability Plan
	Group Life Insurance
	Travel Accident Insurance
	Long-Term Care Insurance
Skills Development:
	Tuition Refund: If aligned with business needs and approved.
	Educational Leaves of Absence: Under appropriate circumstance and approved by management.
Additional Employee Programs:
	Site Offerings: Many sites offer programs including:
		Fitness Centers
		Educational Courses
		Award Programs
		Career Planning Centers
	Clubs: These clubs organize recreational leagues, company-sponsored trips, and a variety of classes and programs.

Payment for Time Not Worked

In providing payment for time not worked, employers recognize that employees need time away from the job for many purposes. Discussed below are paid vacations, sick pay and paid time off, sabbaticals, and other forms of payment for time not worked.

Paid Vacations

In a recent Employee Benefits Trend Study, 64 percent of full-time employees identified paid vacation days as the most important benefit they receive. 13 Payment for time not worked serves important compensation goals. For instance, paid vacations provide workers with an opportunity to rest, become rejuvenated, and thus more productive. They may also encourage employees to remain with the firm. Paid vacation time typically increases with seniority. For example, employees with six months’ service might receive one week of vacation; employees with one year of service, two weeks; ten years’ service, three weeks; and fifteen years’ service, four weeks.

But, some workers are apparently choosing to not take all their vacation. According to a recent survey, American workers are giving back 415 million vacation days a year. 14 In a climate of increased outsourcing and job insecurity, it is not surprising that many Americans do not take full advantage of their vacation benefits. Further, 35 percent of U.S. workers feel stressed about work even while on vacation; CareerBuilder.com found that 39 percent return to work as stressed or more stressed than when they left.15

Vacation time may vary with organizational rank. For instance, an executive, regardless of time with the firm, may be given a month of vacation. With an annual salary of $120,000, this manager would receive a benefit worth approximately $10,000 each year while not working. A junior accountant earning $36,000 a year might receive two weeks of vacation time worth about $1,500.

Sick Pay and Paid Time Off

Each year many firms allocate to each employee a certain number of days of sick leave that they may use when ill. Employees who are too sick to report to work continue to receive their pay up to the maximum number of days accumulated. As with vacation pay, the number of sick leave days often depends on seniority.

Some managers are very critical of sick leave programs. At times, individuals have abused the system by calling in sick when all they really wanted was additional paid vacation. One approach in dealing with the problem of unscheduled absences is to provide more flexibility. In lieu of sick leave, vacation time, and a personal day or two, a growing number of companies are providing paid time off (PTO), a certain number of days off provided each year that employees can use for any purpose. With a PTO plan, all the reasons for time off—sick, vacation, and personal days—are grouped together and no one has to lie. 16 “We had four different time-off programs,” said Paula Mutch, manager of compensation and benefits with Mount Clemens General Hospital in Michigan. “The PTO bank folded them together, and it’s not only much easier for us to administer, it’s easier for employees to understand.”17

According to one survey, up to 27 percent of American firms now have such plans. Maureen Brookband, benefits vice president at Marriott, which has such a plan, says that employees tell her, “It’s very nice, there’s no guilt. You don’t have to use a sick day when you aren’t really sick.” 18 Some critics of the plan feel there is still a need for sick leave. But, as one expert pointed out, a prominent reason for taking sick days is stress, and this factor is not really dealt with. The impact of stress will be discussed in the next chapter.

Sabbaticals

Sabbaticals are temporary leaves of absence from an organization, usually at reduced pay. Although sabbaticals have been used for years in the academic community, they have only recently entered the private sector. According to a recent survey, only 5 percent of companies provide paid sabbaticals but another 18 percent provide unpaid sabbaticals. 19 Often sabbaticals help to reduce turnover and keep workers from burning out; hopefully they will return revitalized and more committed to their work. 20UPS and Xerox are among the growing number of companies who pay employees’ expenses to participate in extended volunteer sabbaticals. Since 1971, Xerox has maintained its Social Service Leave program, which allows employees to take fully paid leaves from their jobs, ranging from three months to a year, to work full-time on volunteer projects of their own design and choosing. Their jobs are waiting for them upon return. 21 Remember the concept of sequencing moms discussed in Chapter 3.

At Fleishman-Hillard, a global public relations firm, employees with four or more years of service can take a six-week sabbatical. Benefits, such as health insurance, continue throughout. The firm pays for two weeks; the employee uses two weeks of vacation, and then takes more weeks without pay. Or employees can take up to one year of unpaid leave and can pay their share of health insurance. They retain the benefit of lower rates from being in the company’s pool. “We were looking for ways to attract and retain employees,” said Agnes Gioconda, Fleishman-Hillard’s chief talent officer. “We find that it reduces employee burnout. They need new ideas for their clients. And it gives us cross-training and career development for others who are out (on leave).” 22

As another example, every employee who has worked at Arrow Electronics, a New York–based distributor of computer products and electronic components, for seven years is eligible for an 8- to 10-week sabbatical. “Employees can use the time off as they wish,” says Kathy Bernhard, director of management development. “We tend to run people really hard,” she explains. “There’s a lot of travel associated with many of these jobs, and it’s a high-stress, high-change industry, so it’s really just a chance for people to get recharged.” Another benefit of the sabbatical program is that of employee development. Employees showing promise and a willingness to learn are assigned to the vacant positions. The opportunity enhances their careers and increases their understanding of the business. 23

Sabbaticals also help to accommodate workplace needs of the baby boomers. According to a recent survey, boomers are likely to continue working, either part-time or full-time, as consultants or by setting up their own companies. They want a flexibleworkplace that lets them take extended sabbaticals and then work intensely for shorter periods of time. They want to phase-inretirement by working fewer hours as they near 65, or after.

Other Types of Payment for Time Not Worked

Although paid vacations and sick pay comprise the largest portion of payment for time not worked, there are numerous other types that companies use. It is common for organizations to provide payments to assist employees in performing civic duties. For example, companies often give workers time off to work with the United Way. At times an executive may be on loan to work virtually full-time on such an endeavor.

Some companies routinely permit employees to take off during work hours to handle personal affairs without taking vacation time. When a worker is called for jury duty, some organizations continue to pay their salary; others pay the difference between jury pay and their salary. When the National Guard or military reserve are called to duty, as has been the case in Afghanistan and Iraq, some companies pay their employees a portion of their salary while on active duty. Further, during an election, many companies permit employees voting time. Still other firms permit bereavement time for the death of a close relative. Finally, there is the payment for time not worked while at the company such as rest periods, coffee breaks, lunch periods, cleanup time, and travel time.

Health Care

Benefits for health care represent the most expensive item in the area of indirect financial compensation. In a recent survey of HR professionals, rising health care costs were listed as number one. 24 Currently, employers spend $300 billion annually on health insurance for employees, dependents, and retirees. When provided, health insurance typically constitutes 25 percent of an employer’s benefit costs. Health insurance premiums have outpaced inflation and wage growth by wide margins. According to a recent study issued by The Kaiser Family Foundation, premiums in the past five years have grown by 73 percent, compared with cumulative inflation (14 percent) and wage rates (up 15 percent) during that same time. Premiums for an average family of four now cost about $11,000 a year. 25

A number of factors have combined to create the high cost of health care:

· An aging population

· A growing demand for medical care

· Increasingly expensive medical technology

· Inefficient administrative processes

In 2004, the Canadian province of Ontario surpassed Michigan in car production. However, most of the cars made in Ontario are manufactured by General Motors, Ford, and DaimlerChrysler. These companies are shifting production out of the United States because of enormous health care costs. In Canada, which has a government-funded and government-run health care system, the cost to the employer per worker is just $800. 26 Recently, General Motors and the United Auto Workers agreed to a substantial cut in the medical benefits GM gives its UAW retirees. That deal saves the company an estimated $1 billion a year after taxes and reduces its total medical cost liability by about $15 billion, which is about GM’s total market value. 27

Managed-Care Health Organizations

In addition to self-insurance (in which firms provide benefits directly from their own assets) and traditional commercial insurers (which supply indemnity insurance covering bills from any health care provider), employers may utilize one of several managed-care options. Managed-care systems have been the general response to increased medical costs. These networks are comprised of doctors and hospitals that agree to accept negotiated prices for treating patients. Employees receive financial incentives to use the facilities within the network. Today, many insured American employees participate in some kind of managed-care plan. Approximately 90 percent of the 178 million Americans insured are covered by group plans from employers. 28 However, some believe that health savings accounts (discussed later) will eventually replace managed-care plans. 29 The following are various forms of managed-care health organizations:

· Health maintenance organizations (HMOs) cover all services for a fixed fee but control is exercised over which doctors and health facilities a member may use.

· Preferred provider organizations (PPO) are managed-care health organizations in which incentives are provided to members to use services within the system; out-of-network providers may be utilized at greater cost. Recent HMO data indicate an enrollment shift to PPOs. 30

· Point-of-service (POS) requires a primary care physician and referrals to see specialists, as with HMOs, but permits out-of-network health care access.

· Exclusive provider organizations (EPOs) offer a smaller PPO provider network and usually provides little, if any, benefits when an out-of-network provider is used.

Each of these managed-care systems appears to be losing its uniqueness. For example, HMOs are developing products that are more flexible and many offer POS and PPOs. Large, independent PPO companies are providing programs that resemble HMOs. Regardless of the precise form, managed-care systems strive to control health care costs.

Consumer-Driven Health Care Plans

Companies are increasingly placing the responsibility for health care on employees. A recent study revealed that consumer-driven plans also reduce total health care costs. 31 The assumption is made that they are in the best position to know what is best for their families. Some of these will be discussed next.

Defined Contribution Health Care Plan

In a defined contribution health care plan, companies give each employee a set amount of money annually with which to purchase health care coverage. In this health care system, employees could shop around, probably using online services, for plans that meet their individual needs. Employees may spend the funds on any medical expense they choose and on any doctor they choose. That is why the plan is often referred to as consumer-driven. 32 The defined contribution health care plan is based on the belief that consumers are in the best position to know what kind of health care they need and how much they want to spend for it. They could also add personal funds to the employers’ contribution and purchase more deluxe coverage.

Health Savings Account

Congress authorized health savings accounts to replace medical savings accounts in 2004. At least 3 million consumers were covered by an HSA in 2006, up from 1 million in 2005. 33 Created by a provision of the Medicare Prescription Drug Improvement and Modernization Act of 2003, the health savings account (HSA) is a tax-sheltered savings account similar to an IRA, but earmarked for medical expenses with high-deductible health plans that have annual deductibles of at least $1,050 for individuals and $2,100 for families.

Individuals can save up to $2,650 a year ($5,250 for families) and withdraw the money tax free for health care expenses, or let it keep growing. Workers do not owe taxes on contributions and if they leave their job, the HSA goes with them. Tax-free money may be used for expected medical costs, such as buying new eyeglasses once a year. 34 Money deposited into HSAs is not owned by an employer and can roll over into the next year. A HSA offers attractive tax breaks, but the HSA program law requires employers who want to offer HSAs to buy high-deductible health insurance and give employees control over the assets in their HSAs. A family’s insurance plan would be used for major medical expenses, whereas the cash in their HSA would go toward out-of-pocket costs, such as prescriptions, co-payments, or special treatments like a CAT scan.

Ted Shannon, equity research analyst for Janus Capital Management, predicts that HSAs will dominate the health care market within 5 to 10 years, eventually replacing managed-care plans. He says HSAs will be 40 percent to 50 percent of the private insurance market by 2010. The reason HSAs will catch on so strongly is that employers will seek to give workers more power over health care choices as they continue to try to lower their costs. The number of employers offering health savings accounts (HSAs) was expected to more than quadruple in 2006, says a Mellon Human Resources & Investor Solutions (HR&IS) survey. 35

Flexible Spending Account

A flexible spending account (FSA) is a benefit plan established by employers that allows employees to deposit a certain portion of their salary into an account (before paying income taxes) to be used for eligible expenses. The employee consents to a reduced salary by allowing the employer to contribute a salary portion to an FSA. There are two categories of FSAs. The first is a medical FSA for expenses not reimbursed by a medical, dental, or vision care plan. The second is a dependent care FSA for dependent care expenses for necessary child or adult day-care services. Until recently, employees who funded the plans faced the possibility that they might lose their share of plan assets at the end of the year. However, the IRS now allows companies to amend their plans to permit a grace period of up to two-and-one-half months immediately following the end of each plan year. Unused benefits or contributions may be paid or reimbursed to plan participants for qualified benefit expenses incurred during the grace period. 36

Now that you have created an appraisal system for employees on your new team and a career development plan for each member, you need a compensation plan for your employees. Because InterClean is embarking on a new strategic direction, upper management has asked you to suggest a new compensation plan specifically for your Puerto Rican team. You must propose the plan and a rationale to the Human Resources Department for approval.

Write a proposal of no more than 1,050 words that includes the following:

• A description of a compensation package for your new employment team
• An explanation of why your pay system will work
• A description of three components of a total rewards package that would motivate employees to reach peak performance
• A description of your compensation plan’s benefits to the individual as well as to the company
• An explanation of how the Puerto Rican compensation plan differs from the parent company’s compensation plan, including a rationale for the differences.