fundamentals of

Human Resource Management 4th

edition

by R.A. Noe, J.R. Hollenbeck, B. Gerhart, and P.M. Wright

CHAPTER 13

Providing Employee
Benefits
McGraw-Hill/Irwin

Copyright 2011 by The McGraw-Hill Companies, Inc. All Rights Reserved.

13-1

What Do I Need to Know?

1. Discuss the importance of benefits
as a part of employee compensation.
2. Summarize the types of employee
benefits required by law.
3. Describe the most common forms of
paid leave.
4. Identify the kinds of insurance
benefits offered by employers.
13-2

What Do I Need to Know?

(continued)

5. Define the types of retirement plans

offered by employers.
6. Describe how organizations use
other benefits to match employees
wants and needs.
7. Explain how to choose the contents
of an employee benefits package.

13-3

What Do I Need to Know?

(continued)

8. Summarize the regulations affecting

how employers design and
administer benefits programs.
9. Discuss the importance of
effectively communicating the
nature and value of benefits to
employees.

13-4

Figure 13.1: Benefits as a

Percentage of Total Compensation

13-5

The Role of Employee

Benefits

Benefits contribute to attracting,

retaining, and motivating employees.
The variety of possible benefits helps
employers tailor their compensation
to the kinds of employees they need.
Employees have come to expect that
benefits will help them maintain
economic security.
Benefits impose significant costs.
13-6

The Role of Employee

Benefits (continued)
Benefits packages are more complex
than pay structures, making them
harder for employees to understand
and appreciate.
The important role of benefits is one
reason that benefits are subject to
government regulation.
Legally required benefits.
Tax laws can make benefits favorable.
13-7

Table 13.1: Benefits Required

by Law

13-8

Benefits Required by Law:

Social Security
The federal Old Age, Survivors,
Disability, and Health Insurance
(OASDHI) program which combines:
Old age (retirement) insurance
Survivors insurance
Disability insurance
Hospital insurance (Medicare Part A)
Supplementary medical insurance
(Medicare Part B)
13-9

Benefits Required by Law:

Social Security (continued)
Employers and employees share the
cost of Social Security through a payroll
tax. The percentage is set by law.
In 2009, employers and employees
each paid a tax of 7.65% on the first
$106,800 of the employees earnings
6.2% of earnings goes to OASDHI
1.45% of earnings goes to Medicare (Part A)
For earnings above $106,800 only the
1.45% for Medicare is assessed
13-10

Benefits Required by Law:

Unemployment Insurance
A federally mandated program
administered by the states.
Focuses on minimizing the hardships
of unemployment:
Payments to unemployed workers.
Help in finding new jobs.
Incentives to stabilize employment.

Most funding comes from federal and

state taxes on employers.
13-11

Benefits Required by Law:

Unemployment Insurance (continued)
The size of the unemployment tax
imposed on each employer depends
on the employers experience rating:
The number of employees a company has
laid off in the past and the cost of
providing them with unemployment
benefits.

Careful human resource planning can

minimize layoffs and keep their
experience rating favorable.
13-12

Benefits Required by Law:

Unemployment Insurance (continued)
To receive benefits, workers must meet
four conditions:
1.They meet requirements demonstrating
they had been employed.
2.They are available for work.
3.They are actively seeking work.
4.They were not discharged for cause,
did not quit voluntarily, and are not out
of work because of a labor dispute.
13-13

Benefits Required by Law:

Workers Compensation
State programs that provide benefits to
workers who suffer work-related
injuries or illnesses, or to their
survivors.
They operate under a principle of nofault liability:
An employee does not need to show that
the employer was grossly negligent in
order to receive compensation.
The employer is protected from lawsuits.
13-14

Benefits Required by Law:

Workers Compensation (continued)
Major categories of benefits:
Disability income
Medical care
Death benefits
Rehabilitative benefits

The amount of benefits income varies

from state to state. It is generally
two-thirds of the workers earnings
before the disability.
The benefits are tax free.
13-15

Benefits Required by Law:

Workers Compensation (continued)
The cost of the workers
compensation insurance depend on
the:
Kinds of occupations involved
State where the company is located
Employers experience rating

Unfavorable experience ratings lead

to higher insurance premiums.
13-16

Benefits Required by Law:

Unpaid Family and Medical Leave
Family and Medical Leave Act
(FMLA) of 1993
Requires organizations with 50 or more
employees to provide up to 12 weeks of
unpaid leave:
After childbirth or adoption
To care for a seriously ill family member
For an employees own serious illness

Employers must also guarantee these

employees the same or comparable job
when they return to work.
13-17

Benefits Required by Law:

Unpaid Family and Medical Leave
(continued)

When employees experience pregnancy

and childbirth, employers must also
comply with the Pregnancy
Discrimination Act.
If an employee is temporarily unable to
perform her job due to pregnancy, the
employer must treat her in the same
way as any other disabled employee.
e.g., modified tasks, alternative
assignments, disability leave, or leave
without pay
13-18

Test Your Knowledge

XYZ company has determined that they
will have to reduce their benefits costs to
stay competitive. Which of the following
solutions is not a choice for XYZ?
a) Eliminate health coverage
b) Reduce the percentage of employees Social
Security insurance they pay.
c) Reduce their unemployment insurance costs
by managing their workforce to avoid layoffs.
d) Institute a safety program to minimize
workers compensation costs.
13-19

Optional Benefits Programs

13-20

Figure 13.2: Percentage of Full-Time

Workers with Access to Selected Benefit
Programs

13-21

Optional Benefits Programs:

Paid Time Of

Vacation
Holidays
Sick Leave
Personal Days
Floating Holidays
Jury Duty
Funerals
Military Duty
Time Off to Vote

Paid Time Off

(PTO) Bank
Most flexible
approach
Employer pools
pools personal
days, sick days, and
vacation days for
employees to use
as the need arises

13-22

Paid time off is a way for

employees to enjoy time with
their families and to refresh
their bodies and spirits.
13-23

U.S. and Japanese Workers

Take Short Vacations
On average,
workers in the
United States take
11 of their 13
vacation days.
Japanese workers ,
on average,
receive 15 vacation
days but only take
7.
13-24

Optional Benefits Programs:

Group Insurance

13-25

Medical Insurance
70% of all full-time
employees in the
U.S. receive
medical benefits
Policies typically
cover:
Hospital expenses
Surgical expenses
Visits to physicians

Additional
coverage may
include:

Dental care
Vision care
Birthing centers
Prescription drug
programs

Mental Health
Parity Act (1996)
13-26

Medical Insurance

(continued)

Consolidated Omnibus Budget

Reconciliation Act (COBRA) of 1985
Federal law that requires employers to
permit employees or their dependents to
extend their health insurance coverage at
group rates for up to 36 months following
a qualifying event:
Layoff
Reduction in hours
Employees death
13-27

Medical Insurance

(continued)

Employer approaches to controlling

health care benefits costs:
1.Managed Care
2.Health Maintenance Organizations
(HMO)
3.Preferred Provider Organizations (PPO)
4.Flexible Spending Accounts
5.Consumer-Driven Health Plans (CDHP)
6.Employee Wellness Programs (EWP)
13-28

Figure 13.3:
Health Care Costs in Various
Countries

13-29

Life Insurance
Employers may provide life insurance
to employees or offer the opportunity
to buy coverage at low group rates.
Term life insurance if the
employee dies during the term of the
policy, the employees beneficiaries
receive a death benefit payment.
Usually twice the employees yearly pay.

Additional benefits may include

accidental death and dismemberment.
13-30

Disability Insurance
Short-Term Disability Insurance
Insurance that pays a
percentage of a
disabled employees
salary as benefits to
the employee for six
months or less.

Long-Term Disability Insurance

Insurance that pays a
percentage of a
disabled employees
salary after an initial
period and potentially
for the rest of the
employees life.

13-31

Optional Benefits Programs:

Retirement Plans
About half of employees working in
the private business sector have
employer-sponsored retirement plans.
Contributory plan - retirement plan
funded by contributions from the
employer and employee.
Noncontributory plan - retirement
plan funded entirely by contributions
from the employer.
13-32

Figure 13.4: Sources of Income for

Persons 65 and Older

13-33

Optional Benefits Programs:

Retirement Plans (continued)
Defined benefit plan pension plan that
guarantees a specified level of retirement
income.
The employer sets up a pension fund to
invest the contributions.
Such plans must meet the funding
requirements of the Employee Retirement
Income Security Act (ERISA) of 1974.
The employer must contribute enough for the
plan to cover all the benefits to be paid out to
retirees.
13-34

Optional Benefits Programs:

Retirement Plans (continued)
Employee Retirement
Income Security Act
(ERISA): federal law
that increased the
responsibility of pension
plan trustees to protect
retirees, established
certain rights related to
vesting and portability,
and created the Pension
Benefit Guarantee
Corporation.

Pension Benefit
Guarantee
Corporation (PBGC):
federal agency that
insures retirement
benefits and
guarantees retirees a
basic benefit if the
employer experiences
financial difficulties.

13-35

Optional Benefits Programs:

Retirement Plans (continued)
Defined contribution plan retirement plan
in which the employer sets up an individual
account for each employee and specifies the
size of the investment into that account.
Money purchase plans
Profit-sharing and employee stock ownership plans
Section 401(k) plans

These plans free employers from the risks that

investments will not perform as well as
expected.
The responsibility for wise investing is with
each employee.
13-36

Figure 13.5: Value of Retirement

Savings Invested at Different Ages

13-37

Test Your Knowledge

Jakar does not know a lot about investing
and wants to ensure he has some
retirement income when he is old enough to
retire. Agnes plans on changing employers
every few years and is interested in
investing her own money. Which plan would
be best for Jakar and Agnes, respectively?
a)
b)
c)
d)

Defined contribution; defined benefit

Contributory; defined benefit
Defined benefit; defined contribution
Defined contribution; non-contributory
13-38

Optional Benefits Programs:

Retirement Plans (continued)
Cash balance plan retirement plan in
which the employer sets up an individual
account for each employee and contributes
a percentage of the employees salary.
The account earns interest at a predefined rate.
This arrangement helps employers plan their
contributions and helps employees predict their
retirement benefits.
If employees change jobs, they generally can roll
over the balance into an individual retirement
account (IRA).
13-39

Optional Benefits Programs:

Retirement Plans (continued)
Vesting Rights
Guarantee that when
employees become
participants in a
pension plan and work
a specified number of
years, they will
receive a pension at
retirement age,
regardless of whether
they remained with
the employer.

Summary Plan Description

Report that describes
a pension plans
funding, eligibility
requirements, risks,
and other details.
Employers also
provide an individual
benefit statement
which describes the
employees vested
and unvested benefits.
13-40

Optional Benefits Programs:

Family-Friendly Benefits

13-41

Figure 13.6: Percentage of

Employees with Various Levels of
Child Care Benefits

13-42

Optional Benefits Programs:

Other Quality of Work-Life Benefits
Subsidized cafeterias
On-site health care
services
Moving and
relocation expenses
Employee discounts
on products
Employee buying
service

Tuition
reimbursement
On-site fitness center
On-site dry cleaning
services
Dues for professional
organizations
Off-site company
recreation area
Pet services
13-43

Selecting Employee Benefits

Decisions about which benefits to offer
should take into account:
The organizations goals and objectives
The organizations budget
The expectations of the organizations
current employees and those it wishes to
recruit in the future.

An organization that does not offer

expected benefits will have difficulty
attracting and keeping employees.
13-44

Table 13.2:
An Organizations Benefits
Objectives

13-45

Employees Expectations and

Values
Employees expect to receive benefits
that are legally required and widely
available.
They value benefits they are likely to
use.
The value employees place on
various benefits is likely to differ from
one employee to another.
13-46

Employee Expectations and

Values (continued)
Organizations can
address differences
in employees
needs and
empower their
employees by
offering flexible
benefits plans in
place of a single
benefits package
for all employees.

Cafeteria-style
plan: a benefits
plan that offers
employees a set of
alternatives from
which they can
choose the types
and amounts of
benefits they want.

13-47

Suggested Ways Employers Can

Control the Cost of Health Benefits
1. Shop for bargains. Every year, the company
should research available plans and
compare quotes from different providers.
2. Know what employees care about. Would
they be willing to accept a higher
deductible if it means the company can also
afford prescription drug coverage?
3. If employees are willing to take
responsibility for their own health care
spending, offer a health- savings account or
consumer-driven plan.
13-48

Suggested Ways Employers Can

Control the Cost of Health Benefits
(continued)

4. Review your claims history. You might be

able to identify correctable problems.
5. Encourage healthy behavior with incentives
like discounts for health club memberships,
free health screenings, and lower premiums
for employees who participate in a wellness
program.
6. Promote a workplace culture that values
healthy habits.
7. Measure the results of any initiative you try.
13-49

Legal Requirements for Employee

Benefits

13-50

Communicating Benefits to
Employees
Organizations must communicate benefits
information to employees so that they will
appreciate the value of their benefits.
This is essential so that benefits can
achieve their objective of attracting,
motivating, and retaining employees.
Employees are interested in their benefits,
and they need a great deal of detailed
information to take advantage of benefits.

13-51

Summary
Like pay, benefits help employers attract,
retain, and motivate employees. The variety
of possible benefits also helps employers
tailor their compensation packages to
attract the right kinds of employees.
Employees expect at least a minimum level
of benefits, and providing more than the
minimum helps an organization compete in
the labor market.
Benefits are also a significant expense, but
employers provide benefits because
employees value them and many benefits
are required by law.
13-52

Summary

(continued)

Employers must contribute to the Old Age,

Survivors, Disability, and Health Insurance
program known as Social Security through a
payroll tax shared by employers and
employees.
Employers must also pay federal and state
taxes for unemployment insurance.
State laws require that employers purchase
workers compensation insurance.
The major categories of paid leave are
vacations, holidays, and sick leave.
13-53

Summary

(continued)

Medical insurance is one of the most valued

employee benefits.
To manage the costs of health insurance,
many organizations offer coverage through
a health maintenance organization or
preferred provider organization, or they may
offer flexible spending accounts.
Retirement plans may be contributory or
noncontributory. These plans may be
defined benefit plans or defined contribution
plans.
13-54

Summary

(continued)

Employers have responded to work-family role

conflicts by offering family-friendly benefits.
In deciding the contents of a benefits package,
organizations need to establish objectives and
select benefits that support those objectives.
Organizations should also consider employees
expectations and values.
Employers must comply with the numerous
laws and regulations affecting how they design
and administer benefits programs.

13-55

Summary

(continued)

Communicating information about benefits

is important so that employees will
appreciate the value of their benefits.
Communicating their value is the main
way benefits attract, motivate, and retain
employees.

13-56