An Overview of Benefits
Employee benefits are group membership rewards that provide security for employees and their family members. They are sometimes called indirect compensation because they are given to employees in the form of a plan (such as health insurance) rather than cash. A benefits package complements the base-compensation and pay-incentives components of total compensation. According to the U.S. Bureau of Labor Statistics, benefits cost U.S. companies about $19,947 per year for the average employee.6 Figure 12.1 shows how the benefit dollar is divided in the average firm.
Employee benefits protect employees from risks that could jeopardize their health and financial security. They provide coverage for sickness, injury, unemployment, and old age and death. They may also provide services or facilities that many employees find valuable, such as child-care services or an exercise center.
FIGURE 12.1 How the Benefit Dollar Is Spent
Source:U.S. Bureau of Labor Statistics (2013). Employer costs for employee compensation.
In the United States, the employer is the primary source of benefits coverage. The situation is quite different in other countries, where many benefits are sponsored by the government and funded with taxes. For example, in the United States employers provide their employees with health insurance, whereas in Canada health insurance is a right bestowed on all citizens by the country’s national health system. For a brief summary of Canada’s health care policy, see Exhibit 12.1, “Benefits Across the Border: A Look at Canada’s Health Care System.”
The benefits package offered by a firm can support management’s efforts to attract employees. When a potential employee is choosing among multiple job offers with similar salaries, a firm offering an attractive benefits package will be ahead of the pack. For example, Swedish Medical Center, a hospital in Denver, Colorado, uses its on-site child-care center as a recruiting tool to attract high-quality staff.7 It is one of only a few organizations in its region that offer this benefit.
Benefits can also help management retain employees. Benefits that are designed to increase in value over time encourage employees to remain with their employer. For instance, many companies make contributions to employees’ retirement funds, but these funds are available only to employees who stay with the company for a certain number of years. For this reason, benefits are sometimes called “golden handcuffs.” An excellent example of the power of benefits to retain employees is the U.S. military, which provides early retirement benefits to personnel who put in 20 years of service. This “20 years and out” retirement provision allows retired military people to start a second career at a fairly young age with the security of a lifelong retirement income to supplement their earnings. These generous benefits help the armed forces retain valuable officers and professionals who would otherwise be attracted to higher-paying civilian jobs.8
Basic Terminology
Before we proceed, let us define some basic terms that we will use throughout this chapter:
-
▪ Contributions All benefits are funded by contributions from the employer, the employee, or both. For example, vacations are an employer-provided benefit: The salary or wages paid to the employee during the vacation period come entirely from the employer. Premiums for health care insurance are often paid partly by the employer and partly by the employee.
-
▪ Coinsurance Payments made to cover health care expenses that are split between the employer’s insurance company and the employee. For instance, under an 80/20 insurance plan, the employer’s insurance company would pay 80 percent of the employee’s health care costs and the employee would pay the remaining 20 percent.
-
▪ Copayment A small payment that the employee pays, usually $15 to $30 dollars, for each office visit to a physician under the health plan. The health plan pays for additional medical expenses that exceed the copayment at no cost to the employee.
-
▪ Deductible An annual out-of-pocket expenditure that an insurance policyholder must make before the insurance plan makes any reimbursements. For instance, the 80/20 plan described previously may also have a $500 deductible, in which case the employee would be responsible for the first $500 of medical expenses before the insurance company makes its 80 percent coinsurance payment.
-
▪ Flexible benefit programs A flexible benefits program , also called a cafeteria benefits program, allows employees to select the benefits they need most from a menu of choices. Unlike employers that try to design a one-size-fits-all benefits package, employers with a flexible benefits program recognize that their employees have diverse needs that require different benefits packages. A 30-year-old married female employee with a working spouse and small children is likely to need child-care benefits and may be willing to forgo extra paid vacation days in exchange for this benefit. A 50-year-old married male employee with grown children may prefer a larger employer contribution to his retirement plan.
The Cost of Benefits in the United States
The cost of employee benefits in the United States has increased dramatically over the decades as businesses have offered more and more benefits. The cost of employee benefits as a percentage of an employer’s payroll increased from 3 percent in 1929 to about 30.9 percent in 2013.9 This growth can be explained by a combination of factors, including federal tax policy, federal legislation, the influence of unions, and the cost savings of group plans.
Federal Tax Policy
Since the 1920s, the federal government has provided favorable tax treatment for group benefit plans that meet certain standards (discussed later in this chapter).10 Employers who meet the tax policy guidelines receive tax deductions for their benefits expenditures.
Employees also receive favorable treatment under the tax policy because they receive many of their benefits on a tax-free basis. For example, employees receive their employer’s contribution to a health insurance plan tax-free. In contrast, self-employed individuals have to pay for health insurance out of their taxable income. Other benefits are received on a tax-deferred basis. For example, employee contributions to a qualified retirement plan (up to a maximum amount) may be tax-deferred until the employee retires, at which time the person may be taxed at a lower rate. Federal tax policy on benefits has encouraged employees to demand additional benefits, because each additional dollar a company allocates for benefits has more value than a dollar allocated as cash compensation, which is taxed as ordinary income.
Federal Legislation
In 1935, federal legislation decreed that all employers must provide Social Security and unemployment insurance benefits to their employees. We take a closer look at these benefits later in this chapter. At this point, we only wish to make the point that federal law requires some benefits and that federal legislation will probably continue to cause significant growth in the cost of benefits.
Union Influence
Unions have been in the forefront of the movement to expand employee benefits for the last half century. In the 1940s, powerful unions such as the United Auto Workers and the United Mine Workers obtained pensions and health insurance plans from employers. In recent years, unions have been asking for dental-care coverage, extended vacation periods, and unemployment benefits beyond those required by federal law.
Once benefit patterns are established in unionized firms, these same benefits tend to spread to nonunionized companies, which often wish to avoid union organization drives.
Cost Savings of Group Plans
Employers can provide benefits for much less money than employees would pay to obtain them on their own. When insurance companies can spread risk over a large group of individuals, they can reduce the cost of benefits per person. This fact causes employees to put considerable pressure on their employers to provide certain benefits.
Types of Benefits
Benefits can be organized into six categories. These categories, which we examine in detail later in this chapter, are:
-
Legally required benefits U.S. law requires employers to give four benefits to all employees, with only a few exceptions: (1) Social Security, (2) workers’ compensation, (3) unemployment insurance, and (4) family and medical leave. In addition, it is a legal requirement that employers with 50 or more employees provide health insurance to employees starting in 2015. All other benefits (including health insurance at small companies with less than 50 employees) are provided by employers voluntarily.
-
Health insurance Health insurance covers hospital costs, physician charges, and the costs of other medical services. Because of its importance, health insurance is usually considered separately from other types of insurance.
-
Retirement Retirement benefits provide income to employees after they retire.
-
Insurance Insurance plans protect employees or their dependents from financial difficulties that can arise as a result of disability or death.
-
Paid time off Time-off plans give employees time off with or without pay, depending on the plan.
-
Employee services Employee services are tax-free or tax-preferred services that enhance the quality of employees’ work or personal life.
Figure 12.2 shows the percentage of full-time U.S. employers providing selected benefits plans. As the figure makes clear, large- and medium-sized private firms (those that employ more than 100 individuals) and state and local governments offer a wider variety of benefits than small businesses do.
The growth of benefits over the years, coupled with increased benefits costs, has encouraged employers to hire more part-time or temporary employees when their business grows. Companies often do not provide benefits to part-time employees and temporary employees. However, both Starbucks and UPS discovered that it pays to offer good benefits even to part-time employees, as explained in the Manager’s Notebook, “Starbucks and UPS Offer Generous Benefits to Part-Time Employees.”
Medium and Large Private Firms* Small Private Firms** State and LocalGovernments Health Insurance 85 57 89 Retirement Plan 82 49 79 Insurance Plans Life Insurance 78 39 82 Long-Term Disability Insurance 45 25 35 Time-Off Plans Paid Vacations 86 69 100 Paid Holidays 87 68 100 Paid Sick Leave 72 51 90 Flexible Benefits Plans 12 4 34 *Firms employing 100 workers or more.
**Firms employing fewer than 100 workers.
FIGURE 12.2
Percentage of Employers Providing Selected Benefit Plans
Source:U.S. Department of Labor, Bureau of Labor Statistics (2013).
MANAGER’S NOTEBOOK Starbucks and UPS Offer Generous Benefits to Part-Time Employees
Ethics/Social Responsibility
Starbucks and UPS depend heavily on part-time employees to provide services to their customers. Each company offers a generous and broad array of employee benefits to its part-time employees. This runs counter to the practices of most companies, which treat part-timers as second-class citizens. Both Starbucks and UPS recognize that it is a good business practice to treat part-time employees well when it comes to benefits. Here we discuss some highlights of the benefits provided by these two companies.
Starbucks employs many part-time employees, called “baristas,” at its ubiquitous coffee shops to serve customers during peak demand times. Part-time employees (those who work between 20 and 40 hours) receive the following benefits:
-
▪ Health care benefits (medical, prescription drugs, dental, and vision care)
-
▪ Retirement savings plan
-
▪ Life insurance and disability insurance
-
▪ Adoption assistance
-
▪ Domestic partner benefits
-
▪ Referral programs and support resources for childcare and eldercare
-
▪ Discounted Starbucks merchandise
-
▪ Participation in stock program
UPS employs many part-time employees (and a large percentage of these part-timers are college students) to sort packages at its package-distribution centers. The shipping business alternates between bursts of activity and slack time throughout the day, which requires a high utilization of part-time employees. UPS part-time employees who work 15 or more hours per week have access to the following benefits:
-
▪ Comprehensive medical and life insurance for the employee and dependents
-
▪ 401(k) retirement plan
-
▪ Funds for tuition assistance
-
▪ Funds available on UPS Earn & Learn Student Loans
-
▪ Paid vacations and holidays
-
▪ Discounted stock-purchase plan
Although most companies only offer benefits to their full-time employees, Starbucks offers benefits to all part-time employees who work 20 hours or more. Offering benefits such as health insurance and retirement plans helps Starbucks attract and retain part-time help.
CandyBox Images/Shutterstock.