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Lecture Outline


T h i r t e e n


Strategic Overview
The Benefits Picture Today
Pay for Time Not Worked
Unemployment Insurance
Vacations and Holidays
Sick Leave
Parental Leave and the Family and Medical
Leave Act
Severance Pay
Supplemental Unemployment Benefits
Insurance Benefits
Workers Compensation
Hospitalization, Health, and Disability
Life Insurance
Benefits for Part-Time and Contingent
Retirement Benefits
Social Security
Pension Plans
Pension Planning
Pensions and the Law
Pension Alternatives
Personal Services and Family-Friendly Benefits
Personal Services
Family-Friendly Benefits
Executive Perquisites
Flexible Benefits Programs
The Cafeteria Approach
Computers and Benefits Administration
Flexible Work Arrangements

In Brief: This chapter discusses the

different benefits and services that
companies might offer to employees.
These benefits and services are
offered to entice employees, retain
employees, and to help make them
more productive during their service.
Interesting Issues: More and more
companies are moving to flexible
benefits packages. Students might
well be prodded to understand the
dynamics driving this, as well as the
costs and benefits to the employer.


The Benefits Picture Today Benefits can be classified by 1) pay for time not
worked; 2) insurance benefits; 3) retirement benefits; and 4) services.
Know Your Employment Law: Benefits There are a myriad of
laws that affect benefits. It is important that expert assistance be
secured when formulating benefits and benefits policies.


Pay for Time Not Worked

A. Unemployment Insurance All states have unemployment insurance or
compensation acts (that follow federal guidelines), which provide for weekly
benefits if a person is unable to work through some fault other than his/her own.

The benefits derive from an unemployment tax on employers that can range from
0.1% to 5% of taxable payroll in most states. An employers unemployment tax
rate reflects its rate of personnel terminations.

Vacations and Holidays The number of paid employee vacation days and
holidays varies considerably from employer to employer. Firms have to address
several holiday- and vacation-related policy issues.

C. Sick Leave provides pay to employees when theyre out of work due to illness.
Most sick leave policies grant full pay for a specified number of permissible sick
days. To minimize employees using their sick leave as extensions to their
vacations, some employers are repurchasing unused sick leave at the end of the
year by paying their employees a daily equivalent sum for each sick leave day
not used or creating a leave bank or paid time off (PTO).
D. Parental Leave and the Family Medical Leave Act stipulates that: 1) private
employers of 50 or more employees must provide eligible employees up to 12
weeks of unpaid leave for their own serious illness, the birth or adoption of a
child, or the care of a seriously ill child, spouse, or parent; 2) employers may
require employees to take any unused paid sick leave as part of the 12-week
leave provided in the law; 3) employees taking leave are entitled to receive
health benefits while they are on unpaid leave, and 4) employers must guarantee
employees the right to return to their previous or equivalent position with no loss
of benefits at the end of the leave; however, the law provides a limited exception
from this provision.
E. Severance Pay a one-time payment when terminating an employee, is a
humanitarian gesture, and good public relations. Most managers expect
employees to give them at least one or two weeks notice if they plan to quit; it
therefore seems appropriate to provide at least one or two weeks severance if
an employee is being dismissed.
F. Supplemental Unemployment Benefits supplement the employees
unemployment compensation, and help the person maintain his/her standard of
living for a time while he/she is out of work due to layoffs, reduced workweeks,
and relocations. They are becoming more prevalent in union agreements.



Educational Materials to Use

Insurance Benefits
A. Workers Compensation refers to the sure, prompt income and medical benefits
provided in work-related accidents to the victims or their dependents, regardless
of fault. Every state has its own workers compensation law and administrative
commission, and some run their own insurance programs. Most states require
employers to carry workers compensation insurance. Neither the state nor the
federal government contributes any funds for workers compensation.
1. How Benefits are Determined Workers Compensation can be monetary or
medical. Monetary awards are based on a formula regarding the disability
involved and the workers average weekly wages. Some disabilities or losses
also receive monetary awards based on a schedule of those losses.


2. Controlling Workers Compensation Costs The costs of insurance premiums

depend on the number and dollar amount of claims, thus minimizing such
claims is important. Some ways to reduce such claims is to screen out
accident-prone workers; reduce accident-causing conditions in your facilities;
and institute effective safety and health programs, and comply with
government standards on these matters. Many firms institute rehabilitation
programs to get injured employees back on the job as fast as possible, since
worker compensation cost accumulate as long as the person is out of work.
B. Hospitalization, Medical, and Disability Insurance is aimed at providing
protection against hospitalization costs and loss of income arising from accidents
or illness occurring from off-the-job causes, and is offered by most employers
because medical care and insurance are so expensive. Employer health and
hospitalization plans must comply with the Americans with Disabilities Act.
Accidental death and dismemberment coverage provides a lump-sum benefit in
addition to life insurance benefits when death is accidental. Disability insurance
provides income protection for loss of salary due to illness or accident. A health
maintenance organization (HMO) is a medical organization consisting of several
specialists operating out of a community-based health care center. Preferred
provider organizations (PPOs), a cross between HMOs and the traditional
doctor/patient arrangement, are groups of health care providers that contract to
provide medical care services at a reduced fee.

New Trends in Health Care Cost Control many employers are changing
their medical plans by: 1) moving away from 100% medical cost payments
and including a deductible; 2) increase annual deductibles; 3) require
medical contributions; 4) use gatekeepers; 5) encourage preventive health
care; 6) form health care coalitions; and 7) manage the cost of aids.


Mental Health Benefits The costs of mental health treatment are rising
because of widespread drug and alcohol problems. There is an increase in
the number of states requiring employers to offer a minimum package of
mental health benefits. The Mental Health Parity Act of 1996 sets minimum
mental health care benefits at the national level.


The Pregnancy Discrimination Act (PDA) prohibits sex discrimination based

on pregnancy, childbirth, or related medical conditions, thus employers must
treat women affected by pregnancy, childbirth, or related medical conditions
the same as any employee not able to work, with respect to all benefits,
including sick leave and disability benefits, and health and medical


COBRA (Comprehensive Omnibus Budget Reconciliation Act)

requirements are that most private employers must make continued health
benefits available to terminated or retired employees and their families for a
period of time, generally 18 months. The former employee must pay for the
coverage, if desired, as well as a small fee for administrative costs.


Long-Term Care is a new benefit aimed at supporting people in their old

age. The Health Insurance Portability and Accountability Act, enacted in
1996, lets employers and employees deduct the cost of long-term care
insurance premiums from their annual income taxes.

C. Life Insurance Most employers provide group life insurance plans, which usually
accept all employees, regardless of health or physical condition.


D. Benefits for Part-time and Contingent Workers Some firms provide holiday, sick
leave, vacation benefits, and some form of health care benefits for employees
who work less than 35 hours a week.



Educational Materials to Use

Retirement Benefits
A. Social Security provides three types of benefits: retirement benefits, survivors
(death) benefits, and disability payments. Retirement benefits provide an income
if you retire at age 62 or thereafter and are insured under the Social Security Act.
Survivor (death) benefits provide monthly payments to your dependents
regardless of your age at death if you were insured under the Social Security Act.
Disability payments provide monthly payments to employees who become totally
disabled (and their dependents) if they work and meet certain specified work
requirements. The Social Security system also administers the Medicare
program, which provides a wide range of health services to people 65 or older.
B. Pension Plans There are a variety of pension plans. Defined contribution plans
specify what contributions the employer will make to the employees retirement or
savings fund. 401 (k) plans are where an employee authorizes the employer to
deduct a certain amount of money from his/her paycheck before taxes and to
invest in the 401(k) plan. Many federal laws govern pensions. Employers have
to consider several policy issues in developing pension plans: membership
requirement; benefit formula; plan-funding; and vesting.
1. 401(k) Plans a popular defined contribution plan in which the employee can
have money deducted from his or her paycheck and deposited in the account
before payroll taxes.
2. Other Types of Defined Contribution Plans in a savings a thrift plan,
employees contribute a portion of their earnings to a fund. The employer
usually matches this contribution in whole or in part. In deferred profit
sharing plans, employers contribute a portion of their profits to the pension
fund. An employee stock ownership plan (ESOP) is a tax-deductible stock
bonus plan.
C. Pension Planning The Employee Retirement Income Security Act Income
Security Act (ERISA) restricts what companies can, cannot, and must do in
regards to pension plans. In developing pension plans, employers must
consider: membership requirements, benefit formula, plan funding, and vesting.
D. Pensions and the Law Under the Employee Retirement Income Security Act
(ERISA), participants in pension plans must have a non-forfeitable right to 100%
of their accrued benefits after 3, 5, or 7 years of service. Under the Tax Reform
Act of 1986, an employer can require that an employee complete a period of no
more than 2 years service to the company before becoming eligible to participate
in the plan. If you require more than 1 year of service before eligibility, the plan
must grant employees full and immediate vesting rights at the end of that period.
E. Pension Alternatives



Early Retirement Windows mean that the company opens up (for a limited
time only) the opportunity for employees to retire earlier than usual, with a
financial incentive, which is generally a combination of improved or
liberalized pension benefits plus a cash payment.


Portability of pension plans refers to making it easier for employees to take

their retirement income when they leave, and roll it over into a new
employers savings plan by switching from defined benefit to defined
contribution plans.


Cash Balance Pension Plans are defined benefit plans under which the
employer contributes a percentage of employees current pay to the
employees pension plans every year, and employees earn interest on this
Improving Productivity Through HRIS: Benefits Management
Systems Benefits administration can be an enormously laborintensive and time consuming activity for an HR department. One of
the main ways HR managers are increasing the productivity of their
benefits dollars is by increasing the utilization of technology.



Educational Materials to Use

Personal Services and Family-Friendly Benefits

A. Personal Services are being provided by many companies.
1. Credit Unions are usually separate businesses established with the
employers assistance to help employees with their borrowing and saving
2. Employee Assistance Programs (EAPs) provide employees with counseling
and/or treatment for problems such as alcoholism, gambling, or stress.
B. Family-Friendly Benefits There are more families in which both adults work,
more one-parent households, more women working, and more people over 55
On-site child care, fitness and medical facilities, flexible work
scheduling, telecommuting, occasional sabbaticals, loan programs for home
computers, stock options, concierge services, even insurance for the family pet
are all part of the compensation package in the new workplace.
1. Effects on Performance There is not a lot of evidence to suggest that
family-friendly benefits improve productivity. Many firms implement them as
part of broader commitment-building programs.
2. Subsidized Child Care is an increasingly desirable benefit, which tend to
improve recruiting results, lower absenteeism, improve morale, garner
favorable publicity, and lower turnover.


3. Elder Care programs are being offered to employers to help employees

who must care for elderly who cant fully care for themselves.
4. Other Job-Related Benefits employers provide include subsidized
employee transportation, food services, and educational subsides.
5. September 11 this terrorist attack had two effects: 1) many firms expanded
their trauma counseling services, and 2) insurance became much more
expensive to obtain.
The New Workplace: Domestic Partner Benefits Many companies
are extending benefits coverage to same sex domestic partners.
Because IRS guidelines do not include such partners in the definition
of dependents, there is considerable doubt that these benefits will
be tax free.
C. Executive Perquisites (perks, for short) include management loans, salary
guarantees, protection for executives if their firms become targets of acquisitions
or mergers, financial counseling, relocation benefits, time off with pay,
outplacement assistance, company cars, chauffeured limousines, security
systems, company planes and yachts, executive dining rooms, physical fitness
programs, legal services, tax assistance, liberal expense accounts, club
memberships, season tickets, credit cards, and childrens education.



Educational Materials to Use

Flexible Benefits Programs When given the opportunity to choose, employees do

prefer flexibility in their benefits plan.
A. The Cafeteria Approach (cafeteria benefits plan is generally synonymous with
flexible benefits plan) is where each employee is given a benefits fund budget to
spend on whichever benefits he/she wants once the employer limits the total cost
for each benefits package and includes certain non-optional items. Flexible
spending accounts let employees pay for certain benefits expenses with pretax
dollars. Core plus option plans establish a core set of benefits, which are usually
mandatory for all employees; then the employees can choose from various
benefits options.
The HR Scorecard, Strategy and Results: The New Benefits Plan
The Hotel Paris implements a new family- friendly benefits plan. Its
centerpiece was a proposal for dramatically improved family-friendly
benefits. Because so many of each hotels employees were single
parents, and because each hotel had to run 24 hours a day, they set
aside a room in each hotel for an on-site child-care facility.
B. Computers and Benefits Administration Computes, including PC-based
systems and the Internet, enable employees to update and manipulate their
benefits packages.
C. Flexible Work Arrangements
1. Flextime is an arrangement by which employees have flexibility in
scheduling their workday around core hours.


2. Compressed Workweeks may consist of four 10-hour days, three 12-hour

days, or other such combinations.
3. Effectiveness of Flextime and Compressed Workweek Programs reviews
indicated that they increase employee satisfaction and productivity. Some
critics are concerned that fatigue and accidents may increase.
4. Other Flexible Work Arrangements there are many other arrangements that
employers may offer. Job sharing is when two people share one full-time job.
Work sharing is when a whole group reduces its hours to prevent layoffs.
Telecommuters work at home and use phones and internet to conduct
When Youre On Your Own, HR for Line Managers and
Entrepreneurs: Benefits and Employee Leasing First Weigh
Manufacturing, a 40-employee firm, signed up with ADP Total Source
to enable its employees to receive employee benefits and HR
services as if they worked for a large firm. Employee leasing firms
are assisting smaller firms to handle their employee-related activities.


Educational Materials to Use

1. You are applying for a job as a manager and are at the point of negotiating salary and benefits.
What questions would you ask your prospective employer concerning benefits? Describe the
benefits package you would try to negotiate for yourself.
You should ask sufficient questions
about all aspects of the benefits package such that you will come away knowing exactly what benefits
you will and will not have. These can be phrased in many ways, but should cover all areas important
to the potential employee. Hopefully, students will be far-sighted enough to understand the
importance of benefits that might not appear to be critical at this stage of their lives. For example, if
students are young and single, they should realize the importance of a good family medical plan as
well as a well-funded retirement plan.
2. What is unemployment insurance? Is an organization required to pay unemployment benefits
to all dismissed employees? Explain how you would go about minimizing your organization's
unemployment insurance tax. Unemployment insurance provides benefits to an individual who is
unable to work through some fault other than his/her own. An organization is not required to pay
unemployment benefits to all dismissed employees. You could minimize your organizations
unemployment insurance tax by making sure that all your managers understand the unemployment
insurance code, train managers and supervisors on discipline and discharge, conduct exit interviews,
verify employment claims, file the protest against a former employee's claim on a timely basis, know
your local unemployment insurance official, and audit the annual benefit charges statement.
3. Explain how ERISA protects employees pension rights. Under ERISA, pension rights must be
vested under one of three formulas. Also, ERISA established the Pension Benefits Guarantee
Corporation to help ensure that pensions meet vesting obligations; the PBGC also insures pensions
should a plan terminate without sufficient funds to meet its vested obligations.


4. What is "portability"? Why do you think it is (or isn't) important to a recent college graduate?
Portability is the ability of an employee to take his or her retirement income when they leave an
organization and roll it over into a new employer's savings plan or IRA. Today's college graduate may
not think about it, but it is important to consider the question of portability. Most college graduates
can expect to change employers several times during their career. Having portable retirement plans
can help ensure that they end up with a reasonable retirement income. If the plans are not portable,
it will take exceptional planning on the employee's part to ensure adequate retirement income.

What are the provisions of the FMLA? The FMLA provides the following: 1) private employers of
50 or more employees must provide eligible employees up to 12 weeks of unpaid leave for their own
serious illness, the birth or adoption of a child, or the care of a seriously ill child, spouse, or parent; 2)
employers may require employees to take any unused paid sick leave or annual leaves as part of the
12-week leave provided in the law; 3) employees taking leaves are entitled to receive health benefits
while they are on unpaid leave, under the same terms and conditions as when they were on the job;
4) employers must guarantee employees the right to return to their previous or equivalent position
with no loss of benefits at the end of the leave; however, the law provides a limited exception from this
provision to certain highly paid employees.


We invite you to visit the Dessler homepage ( on the
Prentice Hall Web site for the best online business support available. This site
provides professors with a customized course Web site, including new
communication tools, one-click navigation of chapter content, and great resources,
such as Internet Resources, an HRCI Exam Prep Guide, assessment exercises, and


1. Working individually or in groups, find out the unemployment rate and laws of your state.
Write a summary detailing your states unemployment laws. Assuming Company X has a 30%
rate of personnel terminations, calculate Company Xs unemployment tax rate in your state.
Suggest that the students use the Internet to research the unemployment rate and laws for your state.
2. Assume you run a small business. Working individually or in groups, visit the Web site Write a two-page summary explaining: (1) the various retirement savings
programs available to small-business employers, and (2) which retirement savings program
you would choose for your small business and why. Based on what they learned from the
chapter and the results of their Internet search, the students should include at a minimum a 401(k)
plan that can be assessed online.
3. You are the HR consultant to a small business with about 40 employees. At the present time
the firm offers only five days vacation, five paid holidays, and legally mandated benefits such
as unemployment insurance payments. Develop a list of other benefits you believe they
should offer, along with your reasons for suggesting them. The specific ones to recommend
would depend partly on the profile of the employees of the firm. In the absence of that information,
the least costly addition of benefits would be to add some sick leave (or personal days) and consider
additional vacation and/or holidays. The next benefit that they might look to would be to add the
availability of some kind of health plan that could include a contributory cost to the employee. This
would be less expensive to the company and add real value to the employees because of group


4. The HRCI Test Specifications appendix at the end of this book (pages 685-692) lists the
knowledge someone studying for the HRCI certification exam needs to have in each area of
human resource management (such as in Strategic Management, Workforce Planning, and
Human Resource Development). In groups of four to five students, do four things: (1) review
that appendix now; (2) identify the material in this chapter that relates to the required
knowledge the appendix lists; (3) write four multiple choice exam questions on this material
that you believe would be suitable for inclusion in the HRCI exam; and (4) if time permits, have
someone from your team post your teams questions in front of the class, so the students in
other teams can take each others exam questions. The material in this chapter that relates to the
HRCI certification exam includes: unemployment insurance, vacations and holidays, sick leave,
parental leave and FMLA, severance pay, supplemental unemployment benefits, workers
compensation, hospitalization, health, and disability insurance, life insurance, benefits for part-time
workers, social security, pension plans, pension planning, pensions and the law, pension trends,
executive perquisites, and flexible benefits programs. Multiple choice questions should reflect
material in this chapter and should have answer choices which could appear plausible.
Experiential Exercise: Revising the Benefits Package
Students are given a scenario of a small business and its benefits package. Students are to devise a
benefits package in keeping with the size and requirements for this firm. This means that they need to
carefully balance the costs and the administration requirements with the resources that the small firm has.
Application Case: Striking for Benefits
1. Assume you are mediating this dispute. Discuss five creative solutions you would suggest for
how the grocers could reduce the health insurance benefits and the cost of their total benefits
package without making any employees pay more. It is suggested that you consider giving this
exercise as a group assignment. Finding five creative solutions will be challenging, but things that
should be considered include: altering deductibles but providing grandfathered employees extra pay
to compensate; altering the pay schedule by increasing the pay for existing employees to
compensate for additional health care costs passed on to them, but new employees not getting that
pay increase; etc.
2. From the grocery chains point of view, what is the downside of having two classes of
employees, one of which has superior health insurance benefits? How would you suggest
they handle the problem? Morale is a critical problem. Anytime there are two classes, jealousy and
resentment increase and morale decreases. Also, administration costs increase. Some of the
suggestions in question #1 might avoid the two classes.
3. Similarly, from the point of view of the union, what are the downsides of having to represent
two classes of employees, and how would you suggest handling the situation? The lower
class employees will feel that they were sold out by the union and may loose faith in the value of
the union. Initially the union will be safe because of the larger number of employees in the better
group, but eventually that will change.
Continuing Case: Carter Cleaning Company

The New Benefits Plan

1. Draw up a policy statement regarding vacations, sick leave, and paid days off for Carter
Cleaning Centers. The students are likely to create different policy statements, which will reflect
their different preferences for benefits.
You should get the students to discuss how might allow for flexibility in their pay for time not worked.


2. What would you tell Jennifer are the advantages and disadvantages to Carter Cleaning
Centers of providing its employees with health, hospitalization, and life insurance programs?
The student should refer to the hospitalization, medical, and disability insurance section of the
chapter to develop their lists of advantages and disadvantages.
3. Would you advise establishing some type of day care center for the Carter cleaning
employees? Why or why not? A better approach for a small company such as Carter would be to
locate a licensed day care provider that would be willing to give a discount to Carter employees.
From that starting point, she could then consider whether to subsidize childcare.



Angelo Hernandez, a recruiter for Focus Pointe, is dissatisfied with his

incentive plan. He feels his current plan, which is based on the quantity
of recruits he brings to the company, does not fairly reward him for his
efforts. Angelo speaks with Chona Castillo in the HR department about
reevaluating his incentive plan, and exploring other forms of
compensation. This segment discusses how and when incentive plans
are best used, as well as alternative methods of compensation: benefits,
services, rewards, etc.
For full video case and discussion questions, please visit the Faculty
Resource section of the Dessler Companion Web Site at:


Indirect financial and nonfinancial payments employees receive for

continuing their employment with the company.

supplemental pay

Benefits for time not worked such as unemployment insurance, vacation,

and holiday pay and sick pay.


Provides benefits if a person is unable to work through some fault other

than his or her own.

sick leave

Provides pay to an employee when he or she is out of work because of


severance pay

A one-time payment some employers provide when terminating an


unemployment benefits

Provide for a guaranteed annual income in certain industries where

employers must shut down to change machinery or due to reduced work.
These benefits are paid by the company and supplement unemployment

worker's compensation

Provides income and medical benefits to work-related accident victims or

their dependents regardless of fault.

health maintenance

A prepaid health care system that generally provides routine round-the-


organization (HMO)

clock medical services as well as preventative medicine in a clinic-type

arrangement for employees, who pay a nominal fee in addition to the
fixed annual fee the employer pays.

preferred provider
organization (PPO)

Groups of health care providers that contract with employers insurance

companies, or third-party payers to provide medical care services at a
reduced fee.

group life insurance

Provides lower rates for the employer or employee and includes all
employees, including new employees, regardless of health or physical

Social Security

Federal program that provides three types of benefits: retirement income

at age 62 and thereafter; survivor's or death benefits payable to the
employee's dependents regardless of age at time of death; and disability
benefits payable to disabled employees and their dependents. These
benefits are payable only if the employee is insured under the Social
Security Act.

pension plans

Plans that provide a fixed sum when employees reach a predetermined

retirement age or when they can no longer work due to disability.

defined benefit
pension plan

A plan that contains a formula for determining retirement benefits.

defined contribution

A plan in which the employer's contribution to employee's retirement or

savings funds is specified.

401(k) plan

A defined contribution plan based on section 401(k) of the Internal

Revenue Code.

savings and thrift plan

Plan where employees contribute a portion of their earnings to a fund;

the employer usually matches this contribution in whole or in part.

deferred profit-sharing

A plan in which a certain amount of profits is credited to each employees

account, payable at retirement, termination, or death.

employee stock
ownership plan (ESOP)

A qualified, tax-deductible stock bonus plan in which employers

contribute stock to a trust for eventual use by employees.

Employee Retirement
Income Security Act

Signed into law by President Ford in 1974 to require that pension rights
be vested, and protected by a government agency, the PBGC.


Provision that money placed in a pension fund cannot be forfeited for any

Pension Benefits
Guarantee Corporation

Established under ERISA to ensure that pensions meet vesting

obligations; also insures pensions should a plan terminate without
sufficient funds to meet its vested obligations.

early retirement

A type of offering by which employees are encouraged to retire early, the

incentive being liberal pension benefits plus perhaps a cash payment.

cash balance plans

Defined benefits plans under which the employer contributes a


of employees current pay to the employees pension plans every year,

and employees earn interest on this amount.
employee assistance
program (EAP)

A formal employer program for providing employees with counseling and/

or treatment programs for problems such as alcoholism, gambling, or

flexible benefits plan /

cafeteria benefits plan

Individualized plans allowed by employers to accommodate employee

preferences for benefits.

job sharing

Allows two or more people to share a full-time job.

work sharing

A temporary reduction in work hours by a group of employees during

economic downturns as a way to prevent layoffs.


Where employees work at home, usually with computers, and use

phones, and the internet to transmit letters, data and completed work to
the home office.