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This document contains Chapters 10 to 13 CHAPTER 10 Employer-Sponsored Retirement Plans and Health Insurance Programs Discussion Questions and Suggested Answers Are employees more likely to favor defined contribution plans over defined benefit plans? How about employers? Explain your answer. Employees are more likely to favor defined benefit plans because they guarantee retirement benefits. This benefit is usually expressed in terms of a monthly sum equal to a percentage of a participant’s preretirement pay multiplied by the number of years he or she has worked for the employer. Defined contribution plans, on the other hand, contain accounts for each employee based on contributions that are made, losses that are debited or gains that are credited. This is why defined contribution plans are more likely to be favored by employers because these plans build strong incentives to perform well throughout the entirety of the given employees’ employment in the company. 10-2. Summarize the controversial issues regarding cash balance plans. There are two key controversies surrounding cash balance plans. The first issue centers on favorable treatment to younger workers and unfavorable treatment to older employees. The second issue is based on the practice of converting traditional defined benefit plans to cash balance plans and reducing benefits. Discuss the basic concept of insurance. How does this concept apply to health care? Insurance is the pooling of risk. In order to have such insurance people often pay monthly or yearly premiums in order to ensure that when an accident or incident does occur, they are prepared to deal with the consequences economically. In health care, insurance covers the cost of a variety of services that promote sound physical and mental health, including physical examinations, diagnostic testing, surgery, hospitalization, psychotherapy, dental treatments, and corrective prescription lenses for vision deficiencies. Some participants consume less than they contribute and some consume more than they contribute. However, because need is unpredictable, all are protected.
Describe the principles of fee-for-service plans and managed care plans. What are the similarities and differences? Fee-for-service plans provide protection against health care expenses in the form of a cash benefit paid to the insured or directly to the health care provider after the employee has received health care services. These plans pay benefits on a reimbursement basis. Three types of eligible health expenses are hospital expenses, surgical expenses, and physician charges. Under fee-for-service plans, policyholders may generally select any licensed physician, surgeon, or medical facility for treatment, and the insurer reimburses the policyholders after medical services are rendered. Managed care plans emphasize cost control by limiting an employee’s choice of doctors and hospitals. Three common forms of managed care are health maintenance organizations, preferred provider organizations, and point-of-service plans. The main difference between these fee-for-service and managed care plans is that fee-for-service allows employees to pick any doctor or hospital they choose, whereas managed care plans limit those choices. Discuss some of the choices an employer may make to help control health care costs. An employer can make different choices in order to help control health care costs, such as health reimbursement accounts, which make it so that employers contribute to each employee’s HRA whereas employees fund FSAs with pretax contributions deducted from their pay. Employers may also choose to limit coverage or to share costs with employees in the form of premium contributions or high co-pays and coinsurance. XV. End of Chapter Case; Instructor Notes, and Questions and Suggested Student Responses Case Name: A Health Savings Account at Frontline PR Instructor Notes The high cost of healthcare insurance is a challenge that many employers are facing. Controlling costs, while providing employees with an affordable option that is competitive with other employers, is important. Consumer-driven healthcare means that employees have more responsibility in their medical spending. The use of HSA's combined with a high-deductible health insurance plan will likely reduce costs for employers. However, it is a new approach to healthcare insurance and employers will likely initially receive resistance from employees who do not understand the option. Suggested Student Responses: What are some advantages of the implementing the HSA option? The HSA coupled with the high deductible healthcare insurance plan offers the company cost savings and also may reduce overall healthcare costs as the employees will be more involved in their healthcare decisions. While the insurance plan has a high deductible, there is a low out-of-pocket maximum expense to the employee. The HSA offers several advantages over the FSA currently offered by Frontline. The HSA allows employees to roll over funds to the next year if they aren’t used. Because FSA’s are ‘use or lose,’ if employees set aside too much money, at the end of the year they may seek out medical treatment that isn’t really necessary. Further, employees find HSA’s attractive because they are portable and the employee can take their balance with them when they leave a company. Further, there are some tax advantages for the employees with the HSA option. What are some potential disadvantages of the HSA option? Because HSA's are not a popular option, employees will not likely be familiar with them. Therefore, it may be a challenge to communicate the benefits of the HSA to employees. Employees will likely have some concerns about their out-of-pocket expenses. The chapter also notes that the structure of the HSA and high deductible healthcare insurance may influence some employees to avoid preventive care, which could lead to more significant problems and healthcare costs later. What do you recommend? Why? I recommend implementing a Health Savings Account (HSA) combined with a high-deductible health insurance plan at Frontline PR. Reasoning: 1. Cost Reduction: • The high cost of healthcare insurance is a significant challenge for Frontline PR. Implementing an HSA combined with a high-deductible health insurance plan can help control costs while providing employees with an affordable option. 2. Competitive Advantage: • Offering an HSA along with a high-deductible health insurance plan will make Frontline PR more competitive with other employers in the industry. It provides employees with a valuable benefit that can help attract and retain top talent. 3. Consumer-Driven Healthcare: • Consumer-driven healthcare puts more responsibility on employees for their medical spending. By offering an HSA, employees have more control over their healthcare expenses and can make informed decisions about their healthcare. 4. Employee Education: • It is essential to educate employees about the benefits of an HSA and how it works. Although there may be initial resistance from employees who are unfamiliar with this option, providing education and support can help overcome this resistance. 5. Long-Term Cost Savings: • While there may be initial resistance from employees, implementing an HSA combined with a high-deductible health insurance plan is likely to reduce costs for Frontline PR in the long term. Employees will have more incentive to make cost-conscious decisions about their healthcare, leading to overall savings for the company. In conclusion, implementing an HSA combined with a high-deductible health insurance plan at Frontline PR is a strategic decision that will help control costs, remain competitive, and empower employees to take control of their healthcare spending. With proper education and support, this approach can lead to long-term cost savings for the company while providing valuable benefits to employees. MYLAB QUESTIONS 10-9. Compare and contrast defined contribution plans with defined benefit plans. Answer: Under defined contribution plans, employers and employees make annual contributions to separate accounts established for each participating employee, based on a formula contained in the plan document. These formulas typically call for employers to annually contribute a given percentage of each participant's compensation. The most common types of these plans are profit-sharing plans, employee stock ownership plans (ESOPs), deferred 401(k) plans, and savings and thrift plans. Under defined benefit plans, employees are guaranteed retirement benefits as spelled out in the plan document. This benefit is expressed in terms of a monthly sum equal to a percentage of a participant's preretirement pay multiplied by the number of years he or she has worked for the employer. The contributions an employer makes typically fluctuate from year to year. Defined benefit and defined contribution plans differ in a number of ways. One difference is the likelihood an employee will achieve retirement income objectives. With a defined benefit plan, the employees know what amount of benefits they will receive upon retirement. With a defined contribution plan, employees will not know this in advance. Another difference is the cost of the two types of plans. With a defined contribution plan, employers know the plan's cost on a year-to-year basis; this is unknown with a defined benefit plan. A third difference is that although both plans are complex to administer, companies find that defined benefit plans are more burdensome. 10-10. Define health insurance concepts such as insurance policy and premium and explain the different types of health insurance programs. What are the differences among these programs? Answer: Insurance policy specifies the amount of money the insurance company will pay for particular services such as physical examinations. Premium is the negotiated amount that employers pay insurance companies to establish insurance policies. Broadly there are three health insurance programs: 1) fee-for-service plans, 2) managed care plans, and 3) point-of-service plans. Fee-for-service plans pay benefits on a reimbursement basis. A cash benefit is paid to the insured or directly to the healthcare provider for the healthcare services. Hospital expenses, surgical expenses, and physician charges are considered eligible health expenses. Managed care plans limit employees' choice of doctors and hospitals to control costs. Health maintenance organizations, a common form of managed care plans, offer prepaid services. On the contrary, fee-for-service plans offer reimbursement. Also, coinsurance rates are generally lower in HMO plans. Point-of-service plans combine the features of fee-for-service plans and HMOs. Like HMOs, employees pay a nominal copayment for each visit to a designated network of physicians. However, employees can receive care from providers outside the designated network of physicians with paying somewhat more for this choice. Additional Cases from the MyManagementLab Website; Instructor Notes, and Questions and Suggested Student Responses Case Name: Cutting Costs at VentaCare Instructor Notes Cost containment is a challenging concern for companies trying to attract and retain talented staff through offering an attractive benefits program. Employees may find benefit offerings attractive, but it is challenging for a company to determine if they are getting a positive return on their investment in a benefits program. Employers should take a strategic approach in determining their benefits program by targeting benefits that promote employee behaviors that add value to the company. Suggested Student Responses: How should Allison approach evaluating VentaCare’s benefit program? Allison should first identify what the objectives are of the benefits program. If staying ahead of their competition is important, she should identify what benefits competitors offer. If they are trying to promote certain employee behaviors, she should specifically identify those behaviors. For example, in the nursing home setting, they most likely want employees to stay healthy so they do not miss work and do not deter the health of the residents. Therefore, wellness programs and other health-related benefits are important. She should also undertake an analysis of actual usage of benefits to make sure all of the benefits they currently offer are being used. For example, if the company finds that the Employee Assistance Program is rarely used, cutting this benefit may be an appropriate cost saving measure. What are some benefits Allison should consider changing or eliminating? Why? Benefits to Consider Changing or Eliminating at VentaCare: 1. Gym Memberships: • While gym memberships are a popular benefit, they may not directly contribute to employee behaviors that add value to the company. Consider eliminating or reducing this benefit to cut costs. 2. Tuition Reimbursement for Non-Job-Related Courses: • Tuition reimbursement for non-job-related courses may not directly contribute to employee skills or performance. Consider restricting tuition reimbursement to courses that directly benefit the company or employees' job roles. 3. High-End Cafeteria Options: • Offering high-end cafeteria options may be costly and not directly contribute to employee productivity or satisfaction. Consider offering more cost-effective cafeteria options to reduce expenses. 4. Unlimited Paid Time Off (PTO): • While unlimited PTO may seem attractive, it can be costly for the company if not managed effectively. Consider implementing a more structured PTO policy to control costs while still providing employees with sufficient time off. 5. Subsidized Commuting Benefits: • Subsidized commuting benefits, such as parking or public transportation subsidies, may not directly contribute to employee performance or company value. Consider reducing or eliminating these benefits to cut costs. Reasoning: 1. Cost Containment: • Cost containment is a significant concern for VentaCare, and it's essential to evaluate benefits that may not provide a positive return on investment. 2. Strategic Approach: • VentaCare should take a strategic approach to its benefits program by targeting benefits that promote employee behaviors adding value to the company. This may involve eliminating or reducing benefits that do not directly contribute to employee performance or company success. 3. Focus on Value-Adding Benefits: • By focusing on benefits that directly contribute to employee performance, skills development, and job satisfaction, VentaCare can ensure that its benefits program is aligned with its strategic objectives and provides a positive return on investment. In conclusion, by evaluating and potentially changing or eliminating certain benefits, VentaCare can better manage costs while ensuring that its benefits program is strategically aligned with the company's objectives and promotes behaviors that add value to the organization. CHAPTER 11 Legally Required Benefits V. Discussion Questions and Suggested Answers Except for the Family and Medical Leave Act, the remaining legally required benefits were conceived decades ago. What changes in the business environment and society might affect the relevance or perhaps the viability of any of these benefits? Discuss your ideas. Social Security is going to be experiencing a large shift on an economic standpoint as begins to give out more money than it’s taking in, which will cause numerous cuts in Social Security benefits for the future. Other changes or rather lack of changes could affect benefits, such as the FUTA not raising or lowering the taxable wage base as the economy shifts. This potential change or lack of change could cause an unfair advantage for certain wage earners and begin to skew the potential income of employees to a new level. Provide your reaction to the statement, “Employee benefits are seen by employees as an entitlement for their membership in companies.” Explain the rationale for your reaction. Employees do indeed often see benefits as entitlements for their membership in companies because they often believe that by working for a company they should get the benefits of employment that they deserve. It is the employer’s job to make sure that the employees are doing what they ought to do according to the companies’ expectations as well as to provide them with the promised benefits. Conduct some research on the future of the Social Security program. Based on your research, prepare a statement not to exceed 250 words that describes your view of the Social Security program. Refer to the information obtained from your research efforts, indicating how it influenced your views. Statement on the Future of the Social Security Program: The future of the Social Security program is a topic of concern due to demographic shifts and economic challenges. While the program currently provides vital support to millions of retirees, there are concerns about its long-term sustainability. Research indicates that the aging population, combined with a declining ratio of workers to retirees, will place significant strain on the Social Security system. Additionally, increasing life expectancies and rising healthcare costs further exacerbate the program's financial challenges. To address these issues, I believe it is crucial to consider a combination of measures, including gradually raising the retirement age, adjusting the payroll tax cap, and exploring means-testing for higher-income retirees. These measures can help ensure the long-term solvency of the Social Security program while preserving benefits for future generations. Furthermore, I support bipartisan efforts to find innovative solutions that balance the need for fiscal responsibility with the commitment to providing adequate support for retirees. By addressing these challenges proactively, we can strengthen the Social Security program and uphold its promise of financial security for all Americans in retirement. In conclusion, while the future of the Social Security program presents significant challenges, I am optimistic that with careful planning and bipartisan cooperation, we can ensure its sustainability for generations to come. VI. End of Chapter Case; Instructor Notes, and Questions and Suggested Student Responses Case Name: Benefits for Part-time Workers Instructor Notes While the trend in the workplace is toward not offering benefits to part-time workers, as more companies discover the benefits of engaging part-time workers, companies must consider the their benefit policies for part-time workers. Extending part-time workers benefits could be costly for companies. However, the need to attract and retain talented part-time workers may influence companies to extend their benefits to part-timers. In doing so, companies should carefully consider which benefits to offer based on the nature of the position, the costs to the company and employee preferences. Further, if a company offers benefits to part-time workers, it is important that they clearly communicate the value of such benefits in order to ensure that part-time workers understand the value of the benefits in their total compensation. Suggested Student Responses: What are some factors that Alan should consider when determining whether or not to offer benefits to part-time workers? Alan should consider the costs associated with extending part-time workers benefits. In doing so, he should estimate the number of part-time workers the firm is likely to hire. He must also look at the type of workers that will be part-time (i.e. administrative or CPA) and whether or not offering benefits is important to attract and retain these workers. Do you think the firm should offer benefits to part-time workers? If yes, should they offer paid time-off, the 401(k) plan and health insurance? Or only one or two of the benefits? Explain your recommendation. Yes, the firm should offer benefits to part-time workers, but the specific benefits offered should be carefully selected based on the nature of the position, cost considerations, and employee preferences. Reasoning: 1. Attracting and Retaining Talent: • Offering benefits to part-time workers can help the company attract and retain talented individuals. In a competitive job market, providing benefits to part-time employees can give the company a competitive edge. 2. Cost Considerations: • While extending benefits to part-time workers may be costly for the company, the long-term benefits of attracting and retaining skilled employees may outweigh the initial costs. 3. Employee Preferences: • Employee preferences should be taken into account when determining which benefits to offer. Conducting surveys or focus groups can help the company understand the needs and preferences of part-time workers. 4. Clear Communication of Benefits: • It is essential to clearly communicate the value of benefits to part-time workers to ensure they understand the total compensation package offered by the company. Recommendation on Specific Benefits: 1. Paid Time Off (PTO): • Offering paid time off to part-time workers can help promote work-life balance and improve job satisfaction. It also provides flexibility for part-time employees to manage personal and family responsibilities. 2. Health Insurance: • Providing health insurance benefits to part-time workers is important for their well-being and financial security. Access to affordable healthcare can help part-time employees stay healthy and productive. 3. 401(k) Plan: • Offering a 401(k) plan to part-time workers can help them save for retirement and provide long-term financial security. While the company may need to consider the costs associated with matching contributions, this benefit can be valuable for attracting and retaining talent. Conclusion: In conclusion, while offering benefits to part-time workers may be costly for the company, the long-term benefits of attracting and retaining talented employees justify the investment. By carefully selecting benefits based on employee preferences and cost considerations, and by effectively communicating the value of these benefits, the company can create a competitive advantage and build a loyal and motivated workforce. MYLAB QUESTIONS 11-6. How does a state determine if an individual is eligible for unemployment insurance benefits? Answer: Being unemployed does not necessarily entitle one to qualify for unemployment insurance benefits. Several criteria have been developed for individuals to qualify for these benefits. To be eligible, an individual must: 1) not have left a job voluntarily, 2) be able and available to work, 3) be actively seeking work, 4) not have refused an offer of suitable employment, 5) not be unemployed because of a labor dispute (except in a few states), and 6) not have had employment terminated because of gross violations of conduct established within the workplace. In addition, all states require sufficient previous earnings, typically $1,000 during the last four quarter periods combined. 11-7. Explain disability benefits under OASDI. Compare it with the workers' compensation. Answer: The SSA pays benefits to seriously disabled workers and family members. Social Security pays only for total disability. The disability must last for at least 1 year or it should result in death. Workers' compensation insurance programs are designed to cover expenses due to work-related accidents. For work-related injuries, workers' compensation pays medical care immediately. It pays temporary disability benefits after 3-7 days of waiting period. Workers' compensation pays permanent, partial, and total disability benefits to employees. It also pays benefits to survivors of workers who die due to work-related issues. On the contrary, in Social Security workers receive pay benefits for long-term disabilities when the disabilities preclude work. Social Security begins after a 5-month waiting period. VII. Additional Cases from the MyManagementLab Website; Instructor Notes, and Suggested Student Responses Case Name: Cutting Costs at Elite Financial Services Instructor Notes The rising cost of healthcare insurance is prompting many employers to take proactive steps to lower their costs. In addition to seeking better premiums through seeking alternate providers and looking at different coverage options, many employers are examining opportunities to improve the overall health of their workforce. Educating the workforce on wise usage of healthcare benefits can help keep experience ratings in check. Taking proactive steps to keep employees healthy and help them make wise decisions on healthcare can help keep costs under control. Suggested Student Responses: What can Elite do to lower their healthcare insurance costs? There are many opportunities for Elite to lower their healthcare insurance costs. First, they may want to consider examining alternate healthcare insurance options such as managed care plans, preferred provider organizations or point-of-service plans. These options will likely be less costly. Elite should also consider changing plan deductibles and coinsurance rates to help control costs. The company could also have employees contribute more toward premiums. Finally, Elite should consider opportunities to educate employees about their health so they make wiser choices on using healthcare. If the employees are contributing more to the cost, they may also make wiser choices as well. Wellness programs to improve the overall health of their employees may also improve healthcare usage rates. Will making changes to the company’s healthcare insurance benefit affect the company’s ability to recruit and retain employees? The company should be cautious about making drastic changes to healthcare insurance all at one time. If the employees believe the company is taking away a significant part of their benefit, they may become frustrated and consider leaving the company. The company may want to consider offering the employees options in their healthcare insurance so that the employees feel as if they have more control. For example, they could keep the fee-for-service indemnity plan as an option, with a higher employee contribution. Then, they could offer an option such as a preferred provider organization and require a much lower employee contribution, encouraging the employee to take the less costly option. CHAPTER 12 Compensating Executives IX. Discussion Questions and Suggested Answers What can be done to make the function of compensation committees consistent with shareholders’ interest? Explain your answer. A compensation committee is made up of members within and outside the company, also known as the Board of Directors. The Board of Directors represent shareholders’ interests by weighing the pros and cons of top executive decisions. The Boards of Directors have members including CEOs and top executives of other successful companies, distinguished community leaders, well-regarded professionals, and possibly a few top-level executives of the company. The best way for a compensation committee to be consistent with shareholder’s interest is to listen to shareholder pleas and reactions to certain decisions, as well as to perform the first three duties of being a compensation committee. These three duties are reviewing consultants alternate recommendations, discussing the assets and liabilities of the recommendations, then making recommendations of the best proposal to the Board of Directors for their consideration. Which component of compensation is most essential to motivate executives to lead companies toward competitive advantage? Discuss your rationale. Senior executive pay is essentially comprised of base pay, annual bonus, and long-term incentives. It can be argued that long-term incentives are the most essential motivators because today they make up the greatest portion of senior executive pay. Discuss your position on executive compensation. Is executive compensation excessive or appropriate? Executive compensation is quite appropriate as it has shown to statistically increase a company’s performance. Problems in the future may arise as workers are laid off due to this excessive pay, but as far as the company shareholders are concerned it is important to improve overall performance and therefore keep the competitive advantage. Discuss the differences between enhanced benefits and perquisites. The main difference between enhanced benefits and perquisites is that in order to be eligible for perquisites one must be an executive. Enhanced benefits are a different matter, for although they are generally only accessible through protection programs that include supplementary coverage, they are not limited to executive ranking. Consult three recent articles (from newspapers, Internet news sources, or business magazines) on executive pay. Using these articles, describe the main issues and then your opinion about whether (or how) executive pay practices should change. Recent articles on executive pay highlight several key issues and challenges in current executive compensation practices. One main issue is the exponential increase in executive pay, even during economic downturns. Many articles discuss how executive pay has reached record highs, creating a significant wealth gap between executives and average workers. This widening pay gap has led to public outcry and calls for reform. Another issue is the lack of transparency and accountability in executive pay practices. Shareholders and the public are increasingly demanding greater disclosure and oversight of executive compensation decisions. There is a growing concern that executive pay is not always tied to company performance, leading to questions about fairness and equity. In my opinion, executive pay practices need to change to address these issues and promote fairness, transparency, and accountability. Firstly, executive compensation should be more closely tied to company performance and long-term value creation. Performance metrics should be transparent and directly linked to shareholder value. This would ensure that executives are rewarded for driving sustainable growth and profitability. Secondly, there should be caps on executive pay to prevent excessive compensation. This could include setting a maximum ratio between CEO pay and the median employee salary within the company. Thirdly, companies should be required to disclose more information about executive pay practices, including performance metrics, bonus structures, and the ratio of CEO pay to median worker pay. Finally, shareholders should have more say in executive pay decisions through increased voting rights and say-on-pay initiatives. Boards of directors should be more accountable to shareholders in setting executive compensation. By implementing these changes, executive pay practices can become more aligned with company performance, more transparent, and more equitable, helping to address income inequality and restore public trust in corporate leadership. X. End of Chapter Case; Instructor Notes, and Questions and Suggested Student Responses Case Name: CEO Pay at in the News Instructor Notes The AFL-CIO posts executive pay information on their website under “Executive PayWatch.” This information is shared with U.S. workers in order to help boost union membership across the country. When workers are aware of the disparity between frontline and top level pay, they are more likely to become frustrated and open to union organization. The disparity is particularly troubling to workers when the company is facing financial difficulty. Beyond working to help determine executive pay levels, the compensation professional must also maintain company morale by communicating to employees about executive pay levels. Suggested Student Responses: What additional information about the CEO’s pay package should Don identify to potentially share with the employees? Executive pay is comprised of several different components and Don should outline those specifically. Depending on the theory used to set the CEO’s pay, Don may want to collect different information. For example, under agency theory, he may want to emphasize the CEO’s ownership in the company. Under social comparison, he may want to obtain information on the market rates of CEO pay in Oakwood’s industry. Further, Don should identify the components of the CEO’s salary that are specifically tied to performance. While the company is having financial difficulty, Don should identify performance data that indicates any success that CEO has had in leading the company. The case may be that while the company is struggling financially, without the leadership of the CEO, they could be doing much worse. How can Don explain the pay disparity to the employees to ease their concerns about the fairness of the CEO’s pay? Explanation of CEO Pay Disparity: To ease employees' concerns about the fairness of the CEO's pay, Don should communicate openly and transparently about the factors influencing executive compensation. Here's how Don can explain the pay disparity to the employees: 1. Performance-Based Compensation: • Don can explain that executive pay is often tied to the company's performance and long-term success. CEOs are compensated based on their ability to drive growth, increase shareholder value, and lead the company effectively. 2. Market Competition: • Don can clarify that executive pay is also influenced by market competition. To attract and retain top talent, companies must offer competitive compensation packages to their executives. The pay levels are benchmarked against similar companies in the industry. 3. Complexity of the Role: • Don can highlight the complexity and responsibility associated with the CEO's role. CEOs are responsible for making critical decisions that impact the company's future, managing risk, and navigating the competitive landscape. As such, their compensation reflects the demands of the position. 4. Company Performance vs. Personal Compensation: • Don can emphasize that executive compensation is tied to company performance rather than personal gain. CEO pay is typically structured to incentivize executives to make decisions that benefit the company and its stakeholders. 5. Employee Value and Contributions: • Don can reassure employees that their contributions are valued and appreciated by the company. While there may be a disparity in pay between executives and frontline workers, the company recognizes the importance of every employee's role in achieving success. 6. Transparency and Open Communication: • Don should commit to maintaining transparency and open communication regarding executive pay. He can assure employees that the company will continue to review and evaluate executive compensation practices to ensure fairness and alignment with company goals. By addressing these points, Don can help employees understand the factors influencing CEO pay and ease their concerns about its fairness. Open communication and transparency are key to maintaining employee morale and trust in the company's leadership. MYLAB QUESTIONS 12-8. Discuss the six forms of deferred (stock) compensation. Answer: Incentive stock options provide executives with the opportunity to purchase company stock, often at a discounted price. As a result, executives realize capital gains with their purchase. Additionally, the federal government accords favorable tax treatment to these purchases in that these gains are not taxed until the disposition of the stock. Nonstatutory stock options are similar to incentive stock options. However, the capital gains are taxed at the time of purchase. Despite this cost, executives' tax liability over the long term is lower. Restricted stock provides ownership control to the executive after a predetermined period, often 5 to 10 years. A further restriction is that if executives terminate their employment prior to the end of the designated period, they must sell the stock back to the company at the original discounted price. However, similar to incentive stock options, the executive does not pay tax until the restriction period ends. Phantom stock provides executives with "hypothetical" company stocks rather than actual shares of company stock. Like restricted stock, these shares are converted into company stock after a predetermined period. Executives must meet two conditions: 1) executives must remain employed for a specified period, and 2) executives must retire from the company. Upon meeting these requirements, executives will receive income equivalent to the value of the increase in stock to the date the phantom stock was first granted. As with several of the other deferred stock options, executives will pay a capital gains tax after they convert the phantom shares to real shares. Discount stock option plans are similar to nonstatutory stock option plans. However, the company grants stock options at rates far below the stock's fair market value on the date the option is granted. Stock appreciation rights grant the executive income at the end of a designated period without actually having to exercise their stock rights. Rather, the company grants the difference in price between the time the stock was granted and its current fair market value. Executives then pay tax on any income from gains in stock value when they exercise their stock rights. 12-9. Briefly discuss the current core compensation and employee benefits of executive compensation. Answer: Current core compensation includes annual base pay and bonuses. Base pay is the fixed element of annual cash compensation. CEO compensation does not follow formal pay structures since their work is unpredictable and very complex. Annual base pay is relatively a smaller part of the CEO compensation. There are four types of bonuses common in executive compensation. Discretionary bonuses are given to executives on an elective basis. Boards of directors look at such factors as company profits, the financial condition of the company, or business conditions and award such a bonus based on sound decisions in these areas. Performance-contingent bonuses are tied to the attainment of specific performance criteria. The performance appraisal system is often used to determine whether these criteria have been met. A third type of bonus is the predetermined allocation bonus. This is based on a fixed formula. Company profits are the main factor in determining the size and amount of the bonus. The target plan bonus is similar to the performance-contingent bonus in that the award is tied to performance, but differs in that it increases commensurably with performance. However, this type of bonus differs from the predetermined allocation bonus in that the predetermined allocation bonus is given regardless of how well executives perform. Executives receive discretionary benefits like other employees, but their protection programs include supplemental coverage providing enhanced protection benefits and services include perquisites. Executives receive supplemental life insurance and supplemental retirement plans as part of their enhanced protection program benefits. Executives receive perquisites covering a broad range of benefits such as use of corporate jets, company cars, or country club membership. XI. Additional Cases from the MyManagementLab Website; Instructor Notes, and Questions and Suggested Student Responses Case Name: Communicating Benefits at JSJ Publishing Instructor Notes Many employers mistakenly assume that employees know what benefits the company is required to provide by law, and which benefits they voluntarily provide. Understanding the benefits program is also important in order for employees to make appropriate decisions about their benefit selections. Further, benefit offerings often comprise a significant part of employees’ total compensation. As companies invest significantly in benefits, they do not get full value from that investment if the employees do not understand the benefits. Suggested Student Responses: Why is it important to provide effective communication about employee benefits? Companies invest significantly in employee benefits and it is important for employees to understand the value of their benefits. Effective communication should help employees understand the value, but also should help employees understand their benefit options so that they can make wise decisions on their benefit selections. What is your opinion of JSJ’s current communication about their benefit program? While JSJ provides thorough information to their employees, they have not made the information easily accessible. They may be providing employees with too much detail and as a result, the employees are not easily able to find the information they need. Further, because employees seem to view the benefits as an entitlement, it seems that JSJ has not communicated in a way that helps employees understand the value of their benefits. For example, they are not aware of what benefits are required by law, and what benefits JSJ provides voluntarily. How can JSJ improve their benefits communication? Improving Benefits Communication at JSJ Publishing: JSJ Publishing can improve their benefits communication by implementing the following strategies: 1. Create a Comprehensive Benefits Guide: • Develop a detailed benefits guide that outlines all the benefits offered by the company, including both mandatory and voluntary benefits. This guide should be easily accessible to all employees, either through the company intranet or in printed form. 2. Provide Clear and Accessible Information: • Ensure that the benefits guide is written in clear, easy-to-understand language. Avoid using jargon or technical terms that may confuse employees. Make sure that the guide is easily accessible and regularly updated to reflect any changes to the benefits program. 3. Hold Benefits Orientation Sessions: • Conduct regular benefits orientation sessions for new hires and existing employees. During these sessions, HR representatives can provide detailed information about the benefits program, answer questions, and help employees understand their options. 4. Utilize Multiple Communication Channels: • Use a variety of communication channels to reach employees, including email, company newsletters, posters, and digital signage in common areas. Consider using multimedia formats such as videos or webinars to explain complex benefits topics. 5. Personalize Communication: • Recognize that employees have different needs and preferences when it comes to benefits. Provide personalized guidance and support to help employees make informed decisions about their benefit selections. 6. Provide Regular Updates: • Keep employees informed about any changes or updates to the benefits program throughout the year, not just during open enrollment periods. This helps ensure that employees are always aware of their benefit options and any new offerings. 7. Encourage Employee Feedback: • Encourage employees to provide feedback on the benefits program and communication efforts. Use surveys or suggestion boxes to gather input from employees about their needs and preferences regarding benefits communication. By implementing these strategies, JSJ Publishing can improve benefits communication and ensure that employees have a clear understanding of the benefits available to them. This, in turn, will help employees make informed decisions about their benefits selections and fully appreciate the value of the benefits provided by the company. CHAPTER 13 Compensating the Flexible Work Force: Contingent Employees and Flexible Work Schedules VII. Discussion Questions and Suggested Answers Discuss some of the problems that companies are likely to face when both contingent workers and core employees work in the same location. Does it matter whether contingent workers and core employees are performing the same jobs? Explain your answer. Possible problems that may arise when companies put contingent workers and core employees in the same location are mentality differences, attitude differences, and work reliance conflicts. Mentality issues generally emerge when one type of employee may feel that the other is inferior or hardly worth their time due to the temporary versus long-term contract. Attitude differences such as one employee treating the other with disregard due to the fact that one may not be there for much longer is also a potential problem. Work reliance conflicts include situations in which a core employee becomes dependent on a contingent worker for substantial work or information and the contingent worker leaves forcing the core employee to put together the pieces. Companies generally pay temporary employees lower wages and offer fewer benefits than they extend to their core counterparts. Nevertheless, what are some of the possible drawbacks for companies that employ temporary workers? Do you believe that these drawbacks outweigh the cost savings? Explain your reasoning. Other possible drawbacks for employing temporary workers include the constant retraining of employees, the funding that is necessary to train these new contingent employees and overall worker confidence or experience in the job related field. Having employees that have limited experience in the company’s line of work could lead to on the job mishaps and failures. Whenever an employee is hired they need to be trained in order to meet the expectations of the employer. In order to meet these expectations, companies must put their employees through extensive training. This training costs money, time, and overall potential customer satisfaction. Customers tend to like coming to the same store, for example, if they see the same friendly face every time. What arguments can be made in favor of using compressed work week schedules for companies that pursue lowest-cost strategies? What are the arguments against using compressed work week schedules in such situations? Compressed work week schedules are profitable for companies that pursue lowest-cost strategies because it reduces the number of times employees must commute between home and work as well as provides more time together for dual-career couples who live apart. However, compressed work week schedules may cause problems for employers as their employees are not necessarily there when they need them to be. What impact will flexible work schedules have on employees’ commitment to their employers? On employee productivity? On company effectiveness? Some U.S. companies use flexible work schedules to help employees balance the demands of work and home life. Flextime, compressed work weeks, and telecommuting should provide single parents or dual-career parents the opportunity to schedule work around special events at their children’s schools. Compressed work weeks enable parents on limited incomes to save on daycare costs by reducing the number of days at the office. Parents can benefit from telecommuting in a similar fashion. Likewise, dual-career couples living apart also benefit from flexible work schedules. Compressed work weeks and telecommuting reduce the time spouses have to spend away from each other. As a result employees are potentially happier and at ease when they come to work, greatly increasing work productivity and overall company effectiveness. An employee’s commitment to their employer will also be relatively high as they are appreciative of the companies or employers policies and their regard to the employee’s life at home. Provide your reactions to the following statement: Contingent workers should be compensated on a pay-for-knowledge system. It would certainly make sense to compensate workers on a pay-for-knowledge system, for when hiring contingent workers it is vital that they are capable of performing up to the standards of the company and that they contribute to the company as a whole. However, pay-for-knowledge systems should not be used as a form of compensation when hiring a contingent worker as a sort of three month interview or as part of an internship in order to later become a full-time employee because of the simple fact that the worker is there to perform to the best of their ability and to learn so as to become a better employee for the future. VIII. End of Chapter Case; Instructor Notes, and Questions and Suggested Student Responses Case Name: Telecommuting at MedEx Instructor Notes: Telecommuting creates a flexible work arrangement that allows employees to work from home, for at least part of the standard workweek. This option can be considered a valuable benefit to employees, particularly if they are challenged with balancing their work and home life. Telecommuting is most appropriate for positions where employees work independently and do not need frequent interactions with co-workers. The Specialists in this case work in positions that are most likely appropriate for telecommuting as they work independently on their own accounts. Suggested Student Responses: Would offering telecommuting as an option benefit MedEx? How? Offering the option for telecommuting could help improve employee satisfaction by giving employees more flexibility. The Specialists could save money on gas and parking and save time commuting. This extra time could help relieve some of the burden in trying to balance their lives. Improved employee satisfaction could lead to lower turnover rates. Offering telecommuting to employees could also offer some advantages in recruiting new employees if potential employees see the option as an attractive benefit. Further, MedEx may be able to lower their overhead expenses and improve overall employee productivity. Are there any disadvantages or challenges in offering telecommuting? Establishing a telecommuting option could be complex for MedEx as they determine how they will ensure that the employees have the equipment and supplies that they need. Further, telecommuting creates several management challenges due to the limited face-to-face contact, such as effectively assessing performance for the purpose of performance appraisals. Employees in telecommuting positions may also feel isolated as they do not have the daily interactions with their co-workers. What do you recommend MedEx do? Why? I recommend that MedEx implement a telecommuting program for its Specialists. Reasoning: 1. Work-Life Balance: • Telecommuting offers employees the flexibility to work from home, which can greatly improve work-life balance. This is particularly valuable for employees who may struggle to balance their work and home life. 2. Increased Productivity: • Telecommuting can lead to increased productivity as employees have fewer distractions and interruptions compared to a traditional office environment. Specialists, who work independently on their own accounts, are likely to thrive in a telecommuting setup. 3. Cost Savings: • Telecommuting can result in cost savings for both the company and employees. Employees save on commuting costs, while the company can save on office space and related expenses. 4. Employee Satisfaction and Retention: • Offering telecommuting as a benefit can improve employee satisfaction and retention. Employees appreciate the flexibility and autonomy that telecommuting provides, leading to higher job satisfaction and lower turnover rates. 5. Position Suitability: • The nature of the Specialists' work, which involves independent work on individual accounts, makes them well-suited for telecommuting. They do not require frequent interactions with co-workers, making telecommuting an appropriate and effective work arrangement. 6. Competitive Advantage: • Implementing a telecommuting program can also give MedEx a competitive advantage in attracting and retaining top talent. In today's job market, flexibility and work-life balance are highly valued by employees. Implementation Steps: 1. Develop Telecommuting Guidelines: • Create clear telecommuting guidelines outlining expectations, responsibilities, and communication protocols for telecommuting employees. 2. Provide Necessary Equipment and Support: • Ensure that telecommuting employees have access to the necessary equipment, technology, and support to perform their job effectively from home. 3. Train Managers and Employees: • Provide training for both managers and employees on how to effectively manage and work in a telecommuting environment. 4. Monitor and Evaluate: • Regularly monitor and evaluate the telecommuting program to assess its effectiveness and make any necessary adjustments. By implementing a telecommuting program for its Specialists, MedEx can improve employee satisfaction, productivity, and work-life balance while also gaining a competitive advantage in the marketplace. MYLAB QUESTIONS 13-9. Explain leased employee arrangements. Discuss employee benefits for leased workers. Answer: Lease companies employ qualified individuals and place them in client companies as a long-term basis. Lease companies provide both wages and benefits to their employees. Leased employees are generally entitled to participation in the client companies' qualified retirement programs; however, the leasing company becomes responsible for leased employees' retirement benefits when the safe harbor rule requirements are met. Client companies are responsible for providing group medical insurance, group life insurance, educational assistance programs, and continuation coverage requirements for group health plans under COBRA for leased employees. 13-10. Discuss flexible work schedules from the perspective of both unions and employees. Answer: Flexible work schedules such as flextime schedules, compressed workweek schedules, and telecommuting help employees balance the demands of work life and home life. Flexible work schedules provide employees to spend more time with their children. For instance, telecommuting arrangements let parents be near their infants or preschool-age children. Compressed workweeks and telecommuting reduce commuting time and expense for employees. Moreover, compressed workweeks and telecommuting provide more time together for dual-career couples. On the other hand, unions generally do not support flexible work schedules. They are concerned about the workers' safety and health due to long hours of working under compressed workweeks or flextime. Besides, unions do not like their members to be telecommuters due to concerns about: employee isolation, uncompensated overtime, and company monitoring in the home. IX. Additional Cases from the MyManagementLab Website; Instructor Notes, and Questions and Suggested Student Responses Case Name: A New Leader at Stylings Instructor Notes: The CEO is responsible for implementing an organization’s competitive strategies and in many cases, has the greatest impact on organizational success. As such, an attractive compensation package is essential to attract the right talent to lead a company. However, the perception of the front line employees is an important consideration in determining compensation. Noted disparities in executive and front line compensation are clearly an issue in the retail industry where many employees are paid close to minimum wage. This disparity should be kept in mind while designing a package that still attracts the right talent and provides incentives for performance. Suggested Student Responses: What role does the compensation package play in attracting the right talent for the CEO position? The CEO holds a significant responsibility in ensuring the success of an organization. A high level of risk comes with that responsibility. To attract a CEO willing to take on such risk, the compensation package must be attractive and provide the incentives to accomplish the goals of the organization. What are some recommendations the consultant may provide to the Board for the compensation package? As base pay is typically a smaller part of a CEO’s compensation package, the recommendations are likely to focus on other aspects of compensation. With the questionable future of the organization, a bonus structure that is contingent on performance is important with a focus on improving revenues. To ensure that the new executive is vested in the future of the company, stock options are an important part of the compensation package. As there is some risk of an acquisition, a golden parachute clause is also likely important. Perquisites should be limited as those are likely to spark the most negative response from employees who are facing budget cuts in the stores. Solution Manual for Strategic Compensation: A Human Resource Management Approach Joseph J. Martocchio 9780133457100, 9780135192146
