Chapter 8 Variable Pay, Executive Compensation, and Benefits Chapter Overview This chapter deals with variable pay (individual incentives, group/team incentives, organizational incentives), and executive compensation. An increasing number of employers feel traditional pay systems fail to link pay with performance. However, to develop a successful pay-for-performance plan the organization must address the following: Does the plan fit the organization? Does the plan reward appropriate actions? Is the plan administered properly? Also, the results of the variable pay plans should be measured to determine how successful the programs are. The three types of variable pay plans include individual, group/team, and organizational incentives. The chapter next presents a more detailed discussion of these types of incentives. Individual incentives encourage workers to achieve individualized goals. Typical individual incentive plans include piece-rate systems, and bonuses. Following the discussion of individual incentive plans, group/team-based variable pay plans are examined. Coverage is given to designing group/team incentive plans, group/team incentive challenges, types of group/team incentives (group/team results and gainsharing). The chapter next looks at organizational incentives such as profit sharing and employee stock plans such as employee stock ownership plans (ESOPs). The chapter then moves to a discussion of executive compensation. Identification of the various elements of executive compensation such as salaries, benefits, perks, annual incentives and bonuses, and long-term performance incentives are presented. Employee benefits represent one of the most significant HR issues facing employers. This chapter presents an overview of the most significant issues associated with benefits and describes benefits offered under five classifications—security, health care, retirement, financial, family-oriented, and time off. The chapter presents a discussion of strategic benefit issues such as the role of benefits as competitive advantage, and the issues around benefits design, administration, technology, measurement, cost control and benefits communication. Then the general types of benefits that are government mandated and the voluntary benefits are covered. Security benefits are then discussed. This includes workers compensation, unemployment, and severance pay. As the nation’s work force grows older, retirement-related benefits take on added importance. Social Security and pension plans are covered with descriptions of defined-benefit pension plans, defined-contribution pension plans, cash balance pension plans, and individual retirement options. Next the legal requirements for retirement benefits are presented with discussions on ERISA, and retirement benefits and age discrimination. The chapter next discusses health care benefits. Employers, usually through insurance, provide a variety of health-care and medical benefits. Increasing costs, especially those for health insurance, have caused employers to seek ways of containing health care benefits costs. Specific approaches include passing on a portion of the costs to employees through copayments and employee contributions, offering managed care options, and using Consumer-Driven Health (CDH) plans, and providing health-care preventive and wellness efforts. Health-care legislation such as COBRA and HIPAA are also discussed. Financial benefits including insurance, financial services, and education assistance are then described and the chapter ends with a discussion of family-oriented benefits and time-off benefits. Chapter Outline I. Variable Pay: Incentive for Performance Variable pay is compensation that is tied to performance. Pay for performance is often used interchangeably with the term variable pay. Incentives are tangible rewards that encourage or motivate action, and therefore might be related to pay or be even broader. The philosophical foundation of variable pay rests on three basic assumptions: Some people or groups contribute more to organizational success than do others. Some people perform better and are more productive than are others. Employees or groups who perform better or contribute more should receive more compensation. A. Successful Variable Pay Employers adopt variable pay for many reasons, including the following: Link strategic business goals and employee performance Enhance organizational results and reward employees financially for their contributions Recognize different levels of employee performance through different rewards Achieve HR objectives, such as increasing retention, reducing turnover, recognizing succession training, and rewarding safety Reduce fixed costs Combating Variable Pay Complexity One factor that can clearly lead to failure of a variable pay plan is having an incentive plan that is too complex for employees and management to understand. B. Global Variable Pay Variable pay is expanding in global firms and in other countries. Also, laws and regulations differ from one country to the next. C. Three Categories of Variable Pay Variable pay plans can be classified into three categories—individual, group/team, and organizational. Individual incentives are given to reward the effort and performance of individuals. Group/team incentives are given when an organization rewards an entire group/team for its performance. Organizational incentives reward people according to the performance results of the entire organization. II. Individual Incentives Individual incentive systems tie personal effort to additional rewards for the individual employee. Conditions necessary to use individual incentive plans are that: Individual performance must be identifiable. Individual competitiveness must be desirable. Individualism must be stressed in the organizational culture. A. Piece-Rate Systems The most basic individual incentive systems are piece-rate systems. Under a straight piece-rate system, wages are determined by multiplying the number of units produced (such as garments sewn or service calls handled) by the piece rate for one unit. A differential piece-rate system pays employees one piece-rate wage for units produced up to a standard output and a higher piece-rate wage for units produced over the standard. B. Bonuses Employees may receive additional compensation in the form of a bonus, which is a one-time payment that does not become part of their base pay. A bonus can recognize performance by an employee, a team, or the organization as a whole. A very large all-or-nothing bonus is called a massive kinked bonus. Another type of bonus that can be awarded at any time is a spot bonus. Spot bonuses are given for extra time worked, extra efforts, or an especially demanding project, and they are often given in cash, gift cards, travel vouchers, or other noncash rewards. III. Group/Team Incentives The use of groups/teams in organizations has implications for incentive compensation. Team incentives can take the form of cash bonuses for the team or items other than money, such as merchandise or trips. But group incentive payments can place social pressure on members because succeeds or failure can be based on how well the group performs. A. Design of Group/Team Variable Pay In designing group/team variable pay, organizations must consider several issues. The main concerns are how and when to distribute the incentives, and who will make decisions about the incentive amounts. Distribution of Group/Team Incentives The two primary ways for distributing those rewards are: Same-size reward for each member Different-size reward for each member Employers can vary rewards given to team members depending on factors such as individual contribution to group/team results, current pay, years of experience, or skill levels of jobs performed. The size of the group/team incentive can be determined either by using a percentage of base pay for the individuals or the group/team as a whole, or by offering a specific dollar amount. Timing of Group/Team Incentives Firms may specify pay outs to be monthly, quarterly, semiannually, or annually, although the most common period used is annually. Shorter time periods increase the likelihood that employees will see a link between their efforts and the performance results that trigger award payouts. Who Makes Decisions about Group/Team Incentive Amounts? Some group/team incentive programs allow members themselves to make decisions about how to allocate the rewards to individuals. B. Group/Team Incentive Challenges The difference between rewarding team members equally and rewarding them equitably triggers many of the problems associated with group/team incentives. Rewards distributed in equal amounts to all members may be perceived as unfair by employees who work harder, have more capabilities, or perform more difficult jobs. This problem is compounded when an individual who is performing poorly prevents the group/team from meeting the goals needed to trigger the incentive payment. C. Types of Group/Team Incentives Group/team reward systems can use different ways of compensating the group. The two most common types of group/team incentives are team results and gainsharing. Group/Team Results Results to be measured may include group production, cost savings, or quality improvement. Those results may be rewarded with cash bonuses, group awards, or some other incentive. Gainsharing The system of sharing greater-than-expected gains in profits and/or productivity with employees is gainsharing. Also called teamsharing or goalsharing, the focus is to increase “discretionary effort,” which is the difference between the maximum amount of effort a person can exert and the minimum amount of effort that he or she needs to exert to keep from being fired. To develop and implement a gainsharing or goalsharing plan, management identifies the ways in which increased productivity, quality, and/or financial performance can occur and decides how some of the resulting gains should be shared with employees. IV. Organizational Incentives An organizational incentive system compensates all employees according to how well the organization as a whole performs during the year. Two common organizational variable pay systems are profit sharing and employee stock plans. A. Profit Sharing As the name implies, profit sharing distributes some portion of organizational profits to employees. The primary objectives of these plans can include the following: Increase organizational performance Attract or retain employees Improve product/service quality Enhance employee morale Focus employees on organizational goals and objectives Typically, the percentage of the profits distributed to employees is set by the end of the year before distribution, although both timing and payment levels are considerations that might be determined later. In some profit-sharing plans, employees receive their portions of the profits at the end of the year. Drawbacks of Profit-Sharing Plans There are a number of drawbacks associated with profit-sharing. First, employees must trust that management will accurately disclose financial and profit information. Second, profits may vary a great deal from year to year, resulting in windfalls or losses beyond the employees’ control. Third, payoffs are generally far removed by time from employees’ individual efforts; therefore, higher rewards may not be obviously linked to better performance. B. Employee Stock Plans Organizational incentive plans can use stock ownership in the organization to reward employees. The goal of these plans is to get employees to think and act like “owners.” A stock option plan gives employees the right to purchase a fixed number of shares of company stock at a specified exercise price for a limited period of time. If the market price of the stock exceeds the exercise price, employees can then exercise the option and buy the stock. Employee Stock Ownership Plans Firms in many industries have an employee stock-ownership plan (ESOP), which is designed to give employees significant stock ownership in their employers. One advantage of establishing an ESOP is that the firm can receive favorable tax treatment on the earnings earmarked for use in the ESOP. Another is that an ESOP gives employees a “piece of the action” so that they can share in the growth and profitability of their firm. C. Metrics for Variable Pay Plans With incentive expenditures increasing each year, it is crucial that the results of variable pay plans be measured to determine the success of the programs. Various metrics can be evaluated, depending on the nature of the plan and the goals set for it. Figure 8-2 shows some examples of metrics that can be used. V. Executive Compensation Executive compensation is usually handled differently than employee. Executives (particularly CEOs) can be rewarded for establishing strategic direction, building an organization, and getting good financial results. A. Executive Compensation Controversy Executive compensation should include an element of risk for the executive. Executive pay is often based more on peer group practices than on a rational executive compensation strategy to make the money spent a strategic advantage. B. Changes in the Context of Executive Compensation The U.S. government has historically involved itself in executive compensation only by requiring more disclosure of compensation from companies, and changing the tax code to favor some payments over others. However, incentive plans have usually been designed in ways to minimize the impact of such attempts at influencing executive pay. “Say on Pay” A provision of the Dodds-Frank Act took a proactive approach. Publically listed companies now must allow share holders to vote on executive compensation. The “Say on Pay” vote is nonbinding yet ignoring the vote could certainly create stockholder relations problems for the board. Clawbacks The “clawbacks” provision in Dodds-Frank allows a company to recover any incentive-based pay that was paid out during the prior three years if it would not have been paid under restated financial statements. This applies to all of a company’s executive officers (typically the top two levels of a company—CEO, President, Senior Vice Presidents, CDO, CFO, CHRO, etc.). C. Elements of Executive Compensation Executives’ total compensation packages consist of much more than just their base pay. Many executives are covered by regular benefits plans that are also available to nonexecutive employees, and some may receive supplemental benefits that other employees do not receive. Perquisites (Perks) are often provided, which are special benefits—usually noncash items—for executives. In addition, senior managers and executives can receive annual bonuses and certain long-term incentives. A stock option gives executives the right to buy stock in a company, usually at an advantageous price. Finally, a golden parachute may be offered, which involves compensation given to an executive if he or she is forced to leave the organization. VI. Employee Benefits and HR Strategy A benefit is a tangible indirect reward provided to an employee or group of employees for organizational membership. Benefits often include retirement plans, paid time off, health insurance, life and disability insurance, and many more. A. Benefits as a Competitive Advantage Benefits can be used to create and maintain a competitive advantage for the organization. While they represent a significant cost, benefits are an important factor in employee commitment and retention. Attracting and retaining employees and increasing productivity are business objectives that can be enhanced through effective design of benefit programs. B. Tax-Favored Status of Benefits Providing employee benefits rather than wages can be advantageous for employees. Most benefits (except for paid-time off) are not taxed as income to employees. The tax-favored status means that a dollar in employee benefits is actually worth much more to an employee. C. Global Benefits There are significant differences in benefits across the globe. In many countries, retirement, health, and other benefits are provided through programs administered by the government. Employers and employees are taxed heavily to pay into government funds that cover these benefits. The amount of paid leave and vacation time also vary significantly around the globe. Paid-time-off for childbirth and medical disability are generous in Scandinavian and European countries and they provide lengthy paid leave for new mothers and fathers. Paid sick leave policies are also more extensive around the world. The United States is the only major developed nation that does not guarantee workers paid sick leave. VII. Managing Benefits Benefit programs must be designed, administered, measured, and communicated. To maximize the impact that employee benefits have on employee satisfaction and retention, careful consideration must be given to designing benefit programs with the overall organizational philosophy and strategy in mind. A. Benefits Design Organizations design benefit plans with a goal of providing value for employees while remaining cost-effective for the company. Many key decisions must be made as part of benefits design. Flexible Benefits A flexible benefits plan allows employees to select the benefits they prefer from options established by the employer. One problem with flexibility in benefit choice is that employees may choose an inappropriate benefits package. Another problem can be adverse selection by employees, whereby only higher-risk employees select and use certain benefits. Since many flexible plans have become complex, they also require more administrative time and information systems to track the choices made by employees. Part-Time Employee Benefits Another key design issue is whether or not to provide benefits to part-time employees. Many employers do not provide part-time employee benefits, except some paid time off. Part-time employees are most likely to receive paid time off and retirement benefits and least likely to receive medical and life insurance benefits. Part-time employees who receive benefits usually do so in proportion to the percentage of full-time work they provide. Domestic Partner Benefits Under some state laws, same-sex domestic partners may be entitled to coverage on company medical insurance plans and to be recognized under retirement plans as a surviving spouse. In states where gay marriage is legal, companies must treat same-sex partners in the same manner as traditional married couples. Older Workers Benefit Needs Hiring and retaining older workers can be an important strategy for an organization seeking high-quality talent with a wealth of knowledge and experience. Modified work schedules, part-time benefits, and simplified seasonal travel can be attractive to older workers. VIII. Benefits Administration, Technology, and Communication Legal compliance, recordkeeping, enrollment and participation issues result in a significant administrative responsibility for organizations. Many organizations offer an open enrollment period once a year. Open enrollment is a time when employees can change their participation level in various benefit plans and switch between benefit options. Outsourcing Benefits Administration One significant trend is the outsourcing of benefits administration. Third party administrators (TPA) are vendors that provide enrollment, recordkeeping, and other administrative services to companies. Technology and Employee Self-Service The spread of HR technology, particularly web-based and mobile systems, has significantly changed the benefits administration burden on HR staff. Internet and computer-based systems are being used to communicate benefits information, conduct employee benefits surveys, and facilitate benefits administration. Self-service allows employees to change their benefits choices, track their benefits balances, and submit questions to HR staff members and external benefits providers. A. Benefits Measurement Numerous HR metrics can be used to evaluate whether benefits are providing the expected results in terms of employee retention and satisfaction. Other metrics are used to measure the return on the expenditures for various benefits programs provided by employers. Some common benefits that employers track using HR metrics are workers’ compensation, wellness programs, prescription drug costs, leave time, tuition aid, and disability insurance. B. Benefits Cost Control Since benefits costs have risen significantly in the past several years, particularly for health care, employers are focusing more attention on measuring and controlling them, even reducing or dropping benefits offered to employees. Another common means of benefits cost control is cost sharing, which refers to having employees pay for more of their benefits costs. The majority of firms use this strategy along with wellness programs, offering employee health education efforts, and modifying prescription drug programs. C. Benefits Communication Employees generally do not know much about the values and costs associated with the benefits provided by employers. This is in large measure due to ineffective communication by the company. Consequently, many employers develop special benefits communication systems to inform employees about the monetary value of the benefits they provide. Benefits Statements Some companies give individual employees a personal statement that translates benefits into dollar amounts. These statements give employees a snapshot of the total compensation they receive. They help employees to see the “hidden paycheck”—the value of their benefits. D. Types of Benefits A wide range of benefits are offered by employers. Some are mandated by laws and government regulations, while others are offered voluntarily by employers as part of their HR strategies. Figure 8-3 lists the major categories of benefits and highlights those that are legally required and those that are voluntarily provided by employers. Employers voluntarily offer a variety of benefits to help them compete for and retain employees. As jobs become more flexible and varied, both workers and employers recognize that choices among benefits are necessary, as evidenced by the growth in flexible benefits and cafeteria benefit plans. A cafeteria benefit plan is one in which employees are given a budget and can purchase the bundle of benefits most important to them from the “menu” of options offered by the employer. IX. Legally Required Benefits The earliest benefits law was the Social Security Act passed at the end of the Great Depression. Little was done on the federal level after that until the 1970s and later. Federal statutes have been enacted to address financial and employment security for workers, particularly those with medical problems. A. Social Security and Medicare The Social Security Act of 1935 and its later amendments established a system to provide old-age, survivor’s, disability, and retirement benefits. Administered by the federal government through the Social Security Administration, this program provides benefits to previously employed individuals. Medicare was implemented in 1965 to provide medical care for people over the age of 65. The Federal Insurance Contributions Act (FICA) was passed to facilitate payroll contributions in support of both programs. Social Security Employees and employers share in the cost of Social Security through a tax on employees’ wages or salaries. When the law was first enacted, employers and employees each contributed 1% of worker wages to the fund. By 1990 the rate had increased to 6.2% paid by each party (for a total of 12.4%), which is the current rate of payroll tax contributions. The amount of wages subject to tax is reviewed and increased periodically. In 2013 the taxable wage base was $113,700. Earnings over that amount are not subject to Social Security tax. Medicare Medicare is the health insurance program for older Americans (age 65 and above) and for some disabled citizens. Medicare is funded by a tax on employers and employees. Each party pays 1.45% of employee earnings. Unlike the taxes paid for Social Security, there is no earnings limit on Medicare contributions. Therefore, all wages earned by workers are taxed at 2.9%. Medicare is a comprehensive, government-operated insurance program that provides a broad spectrum of benefits. B. Workers’ Compensation Workers’ compensation provides security benefits to workers who are injured on the job. State laws require most employers to provide workers’ compensation coverage by purchasing insurance from a private carrier, state insurance fund, or self-insurance. Workers’ compensation regulations require employers to give cash benefits, medical care, and rehabilitation services to employees for injuries or illnesses occurring within the scope of their employment. In exchange, employees give up the right to pursue legal actions and awards. C. Unemployment Compensation Unemployment compensation was established as part of the Social Security Act of 1935 to provide a minimum level of benefits for workers who are out of work. Each U.S. state operates its own unemployment compensation system and benefit levels and job-search provisions differ significantly from state to state. Each company pays an unemployment tax that is based on an “experience rate” which reflects the number of claims filed by workers who leave. Under normal circumstances, an employee who is out of work and actively looking for employment can receive up to 26 weeks of pay at the rate of 50% to 80% of normal pay. Most employees are eligible. However, workers fired for misconduct or those not actively seeking employment generally are ineligible. During times of widespread economic hardship, the government might increase the number of weeks during which eligible workers receive benefits. X. Retirement Benefits The aging of the workforce in many countries is affecting retirement planning for individuals and retirement plan costs for employers and governments. In the United States, the number of citizens at least 55 years or older has increased significantly in recent years, and older citizens constitute a large portion of the population. More workers are delaying retirement because of financial difficulties and decreased value of retirement savings coupled with longer lifespans. Unfortunately, most U.S. citizens have inadequate savings and retirement benefits to fund their retirements. While traditional pension plans that provided a defined amount for retirement at a defined age were the norm for decades, since the early 1980s fewer companies have provided these benefits. Instead, employee-funded retirement accounts have become the standard. Therefore, individuals must rely on Social Security payments, which were not designed to provide full retirement income. A. Retirement Plan Concepts Certain rights are associated with retirement plans. One such right called vesting means that the employee has a benefit that cannot be taken away. If employees resign or are terminated before they have been employed long enough to be vested, no pension rights accrue to them except the funds they have contributed. If employees work for the required number of years to be fully vested, they retain their pension rights and receive the amounts contributed by both the employer and themselves. Another feature of some retirement plans is portability. In a portable plan, employees can move their retirement benefits from one employer to another. Instead of requiring workers to wait until they retire to move their retirement plan benefits, once workers have vested in a plan they can transfer their fund balances to other retirement plans if they change jobs. B. Retirement Plans A retirement plan is a program established and funded by the employer and/or employees to fund the employee’s retirement years. Organizations are not required to offer retirement plans to employees beyond contributions to Social Security. There are two broad categories of retirement plans—defined benefit plans and defined contribution plans. Defined Benefit Pension Plans Through a defined benefit (DB) plan, employees are promised a pension amount based on age and years of service. Contributions are based on actuarial calculations of the benefits to be paid to employees after retirement and the formula used to determine such benefits. A defined benefit plan gives employees greater assurance of benefits and greater predictability in the amount of benefits that will be available for retirement. In a defined contribution (DC) plan, contributions are made to the plan by the employer and/or employee to fund an account for the employee’s retirement. The key to this plan is the contribution rate; employee retirement benefits depend on fixed contributions and investment earnings. Profit-sharing plans, employee stock ownership plans (ESOPs), and 401(k) plans are commonly defined contribution plans. Cash Balance Pension Plans Some employers have changed traditional pension plans to hybrids based on ideas from both defined benefit and defined contribution plans. One such plan is a cash balance plan, in which retirement benefits are based on an accumulation of annual company contributions, expressed as a percentage of pay, plus interest credited each year. With these plans, retirement benefits accumulate at the same annual rate until an employee retires. XI. Legal Regulation of Retirement Benefits Numerous laws and regulations affect retirement plans. Key regulations govern plan communications, funding, and other important aspects of retirement programs. A. Employee Retirement Income Security Act Widespread criticism of many pension plans led to enactment of the Employee Retirement Income Security Act (ERISA) in 1974. The purpose of this law is to insure that private pension plans meet minimum standards. ERISA requires plans to periodically provide participants with information about the plan features (such as vesting) funding, and benefit accrual amounts, and it gives participants the right to file lawsuits for violations of the law. B. Retirement Benefits and Age Discrimination According to a 1986 amendment to the Age Discrimination in Employment Act (ADEA), most employees cannot be forced to retire at a specific age. In many employer pension plans, “normal retirement” is the age at which employees can retire and receive full pension benefits. Employers must decide whether individuals who continue to work past normal retirement age (typically 65) are eligible for the standard benefits package provided to active employees under age 65. Early Retirement Many pension plans include provisions for early retirement to allow workers to retire before the normal retirement age. Phased retirements are alternatives being used by individuals and firms. Phased retirement allows employees to bridge between these two states while offering the company a chance to retain important knowledge and skills. Buyout programs often include incentives such as outplacement services, health care benefits, and a severance payment. There is of course a risk that too many employees will participate; thereby leaving the company shorthanded. Older Workers Benefit Protection Act The Older Workers Benefit Protection Act (OWBPA) was enacted in 1990 as an amendment to the ADEA. It requires equal treatment for older workers in early retirement or severance situations. It also sets specific criteria that must be met if older workers are asked to sign waivers promising not to sue for age discrimination in exchange for severance benefits during layoffs. XII. Health Care Benefits Employers provide a variety of health care and medical benefits, usually through insurance coverage. The most common plans cover medical, dental, prescription drug, and vision care expenses for employees and their dependents. Major changes brought about by the Patient Protection and Affordable Care Act, which is still evolving, may significantly alter the involvement of employers in providing these essential benefits. A. Increases in Health Benefits Costs For several decades, the costs of health care have escalated at rates well above those of inflation and increases in workers’ earnings. Consequently, many employers find that dealing with health care benefits is time consuming and expensive. B. Health Care Reform Legislation Landmark legislation enacted in 2010 changed health care in the United States, making insurance available to an additional 32 million people. The Patient Protection and Affordable Care Act were phased in over several years, culminating in universal coverage in 2014. While the act was vehemently opposed by many, the Supreme Court ruled in 2012 that the provisions of the law were constitutional. Key Provisions The PPACA includes many important provisions intended to provide affordable health care for all citizens. To achieve this goal, enrollment in health coverage is now mandated for every citizen. Key elements of the law are highlighted in Figure 8-4. C. Employer-Sponsored Plans Employers will face a decision about continuing to offer their own health insurance plans or to drop their plans in favor of government-sponsored coverage. Beginning in 2014, employers with at least 50 employees are required to provide minimum essential health care coverage to all full time employees. Employers that fail to provide adequate health coverage will pay an annual penalty of $2,000 per employee. Employers that provide high-cost health benefits to employees may face a 40% excise tax. If the premium cost for the benefit plan exceeds federal limits, the employer would pay additional taxes. D. Controlling Health Care Benefit Costs Employers offering health care benefits are taking a number of approaches to control and reduce their costs. The most prominent strategies include the following: Changing copayments and employee contributions Using managed care Switching to consumer-driven health plans Increasing health preventive and wellness efforts Increasing Employee Cost Sharing A deductible is an amount paid by an insured individual for a medical service before the medical plan pays any expenses. Employers who raise the per-person deductible from $50 to $250 realize significant savings in health care expenses because employees use fewer health care services and prescription drugs. Copayments are costs that an insured pays for medical treatment. Companies can increase the fixed co-pay amount, increase the percentage, or increase the dollar amount on which employees share costs. E. Increasing Employee Contributions Employees are usually required to pay a portion of the monthly premium to maintain health care insurance. On average, single employees pay 18% of premiums, while employees with family coverage pay 28% of premiums. Using Managed Care Several other types of programs attempt to reduce health care costs paid by employers. Managed care consists of approaches that monitor and reduce medical costs through restrictions and market system alternatives. Managed care plans emphasize primary and preventive care, the use of specific providers that charge lower prices, restrictions on certain kinds of treatment, and prices negotiated with hospitals and physicians. Spousal Exclusions Spousal exclusion provisions limit access to a company’s health plan when an employee’s spouse works for another company that offers health insurance. Companies may charge a premium surcharge to enroll the spouse or require that the spouse enroll in his or her own employer’s plan. F. Consumer-Driven Health Plans Some employers are turning to health insurance plans where the employee chooses the insurance. The most widely used is a consumer-driven health (CDH) plan in which the employer provides financial contributions to employees to help cover their health-related expenses. G. Dental and Vision Coverage Additional health benefits frequently include coverage for dental and vision care expenses. Employees typically pay a portion of the premium for dental and vision plans. These plans often emphasize preventive care. H. Improving Health through Wellness Initiatives Preventive and wellness efforts can take many forms. Many employers offer programs to educate employees about health care costs and how to reduce them. Newsletters, formal classes, and other approaches are designed to help employees understand why health care costs are increasing and what they can do to control them. A key strategy of cost reduction is wellness programs that focus on improving worker health. I. Health Care Legislation Several laws have been enacted to provide protection for employees who leave their employers, either voluntarily or involuntarily. To date, the two most important laws passed that govern these issues are COBRA and HIPAA. COBRA Provisions The Consolidated Omnibus Budget Reconciliation Act (COBRA) requires that most employers with 20 or more full-time and/or part-time employees offer extended health care coverage to certain groups of plan participants. The different groups are as follows: Employees who voluntarily quit or are terminated Widowed or divorced spouses and dependent children of former or current employees Retirees and their spouses and dependent children whose health care coverage ends Any child who is born or adopted by a covered employee Other individuals involved in the plan such as independent contractors and agents/directors A qualifying event is an event that causes a plan participant to lose group health benefits. Typically, reduction in work hours or loss of employment constitutes a qualifying event for employees. Divorce or death of an employee constitutes a qualifying event for covered family members. When a qualifying event occurs, a complex notification process begins. There are several deadlines that the company and the employee must meet to comply with COBRA requirements. The individual no longer employed by the organization must pay the premiums, but the employer may charge the individual up to 102% of the premium costs. The 2% premium addition generally falls well short of the true cost of providing this coverage. HIPAA Provisions The Health Insurance Portability and Accountability Act (HIPAA) of 1996 allows employees to switch their health insurance plans when they change employers and to enroll in health coverage with the new company regardless of preexisting health conditions. The legislation also prohibits group insurance plans from dropping coverage for a sick employee and requires them to make individual coverage available to people who leave group plans. One of the greatest impacts of HIPAA comes from its provisions regarding the privacy of employee medical records. These provisions require employers to provide privacy notices to employees. XIII. Financial Benefits Companies may offer employees a wide range of special benefits that provide financial support to employees. Employers find that such benefits can be useful in attracting and retaining employees. Workers like receiving these benefits, which often are not taxed as income. A. Insurance Benefits In addition to health care insurance, some companies provide other types of insurance. These benefits offer major advantages for employees because employers pay some or all of the costs. The most common types of insurance benefits are life insurance, disability insurance, long-term care insurance, and legal insurance. B. Financial Services Financial benefits include a wide variety of items. A credit union sponsored by the employer provides saving and lending services for employees. Purchase discounts allow employees to buy goods or services from their employers at reduced rates; often in a company store. Discount programs and club memberships may also be offered to allow employees to purchase goods from local vendors or “club” stores at lower rates. Employee thrift plans, savings plans, or stock purchase plans may be available. Financial planning and counseling are especially valuable services for executives, many of whom may need information on investments and tax shelters, as well as comprehensive financial counseling, because of their higher levels of compensation. C. Education Assistance Another benefit that is popular with employees is education assistance and tuition aid, which pays some or all of the costs associated with formal education courses and degree programs. D. Severance Pay Companies may provide severance pay to individuals whose jobs are eliminated or who leave the company by mutual agreement. While the Worker Adjustment and Retraining Notification Act (WARN) of 1988 requires employers to give 60 days’ notice of mass layoff or plant closings, it does not mandate severance pay. The amount of severance pay is often determined by an employee’s level within the organization and years of service with the company. Some employers provide continued health insurance or outplacement assistance as part of the severance pay package. XIV. Family-Oriented Benefits Workers seek out companies that balance work and nonwork obligations and offer family-friendly benefits. The major legal requirement regarding family-oriented benefits is the Family and Medical Leave Act (FMLA). A. Family and Medical Leave Act The FMLA was enacted in 1993 and amended several times. It covers all federal, state, and private employers with 50 or more employees who live within 75 miles of the workplace. Only employees who have worked at least 12 months and 1,250 hours in the previous year are eligible for leave under the FMLA. FMLA Leave Provisions The law requires that employers allow eligible employees to take a maximum of 12 weeks of unpaid, job-protected leave during any 12-month period for the following situations: Birth of a child and care for the newborn within one year of birth Adoption or foster care placement of a child Caring for a spouse, child, or parent with a serious health condition Serious health condition of the employee Military family members who must handle the affairs for military members called to active duty 26 weeks leave to care for a military service member injured while on active duty A serious health condition is an illness or injury that requires inpatient care or continuing treatment by a health care provider for medical problems that exist beyond three days. An employer may require a medical certificate from a health care provider to support the reason for the employee’s leave. The Department of Labor has issued many guidelines regarding FMLA employee leaves (Figure 8-5). B. Family-Care Benefits Family issues are important for many organizations and workers. Companies may offer work/life balance options to all employees regardless of family status. A variety of family benefits can be provided. Adoption Benefits Many employers provide maternity and paternity benefits to employees who give birth to children. A comparatively small number of employees adopt children, and in the interest of fairness and life enrichment, some organizations provide specific benefits to support adoption. Child-Care and Elder-Care Assistance Balancing work and family responsibilities is a major challenge for many workers. Whether they are single parents or dual-career couples, employees often experience difficulty obtaining high-quality, affordable child care. Figure 8-6 highlights programs to help employees deal with child-care and elder-care issues. XV. Paid-Time-Off Benefits Time-off benefits represent a significant portion of total benefits costs. Employers give employees paid time off for a variety of circumstances. Paid lunch breaks and rest periods, holidays, and vacations are common. A. Vacation Pay Paid vacations are a common benefit. Employers often use graduated vacation-time scales based on the employees’ lengths of service. Some companies have a “use it or lose it” policy whereby employees forfeit any vacation not used during the year. Other companies have policies to “buy back” unused vacation time, or they allow employees to donate unused vacation days to a pool that can be used by other workers. B. Holiday Pay Most employers provide pay for a variety of holidays. Employers in the United States, commonly offer fewer paid holidays than those in many other countries. The number of paid holidays can vary depending on state/provincial laws and union contracts. C. Leaves of Absence Employers grant leaves of absence, taken as time off with or without pay, for a variety of reasons. Leaves are given for a variety of purposes. Some, such as military leave, election leave, and jury leave, are required by various state and federal laws. Funeral leave or bereavement leave is another common type of leave offered. Family Leave FMLA guarantees unpaid leave for certain family and medical reasons. Even though paternity leave for male workers is available under the FMLA, a relatively low percentage of men take it. The primary reason for the low usage is a perception that it is not as socially acceptable for men to stay home for child-related reasons. This view has begun changing as Gen X fathers are participating more actively in childrearing duties. Sick Leave Many employers allow employees to miss a limited number of days because of illness without losing pay. Others pay their employees for unused sick leave. Some companies have shifted the emphasis to reward people who do not use sick leave by giving them well pay—extra pay for not taking sick leave. Another approach is to use a paid-time-off plan. D. Paid-Time-Off Plans A growing number of employers have made use of a paid-time-off (PTO) plan, which combines all sick leave, vacation time, and holidays into a total number of hours or days that employees can take off with pay. Many employers have found PTO plans to be more effective than other means of reducing absenteeism, scheduling time off, increasing employee understanding of leave policies, and assisting with recruiting and retention. E. Employee-Paid Group Benefits To combat the high cost of benefit programs, some companies offer employees the opportunity to purchase benefits through payroll deductions. The cost for these benefits is typically less than the employee could purchase on his or her own because the buying power of the group reduces the cost. Adding employee-paid voluntary benefits is becoming a popular cost-effective strategy for many companies. It is part of a trend that gives employees choices but also makes them responsible for selecting and funding the benefits they find valuable. In particular, employees are willing to pay for the cost of income protection insurance in the case of disability. Other employee-paid benefits include pet health care insurance, critical-illness coverage (cancer care), and supplemental life insurance. Instructor Manual for Human Resource Management: Essential Perspectives Robert L. Mathis, John Jackson, Sean Valentine 9781305115248
Download
Close
Close
