Chapter 9.doc

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Western University
Management and Organizational Studies
Management and Organizational Studies 3342A/B
Linda Eligh

Chapter 9 – Employee Benefits • A first class benefits plan includes some mix of: education reimbursement and employee training, on-site childcare services, financial counseling, concierge services, retirement benefits and no- cost benefits such as casual dress • Introduction to employee benefits o Part of the total compensation package, other than pay for time worked, provided to employees in whole or in part by employer payments, such as life insurance, pension plans, worker comp, vacation, and so on o Employee satisfaction with benefits is positively related to job satisfaction o Rapid rise in employee benefit costs – 15% to 40% today o Might see benefits as a labour costs with no proven returns o Employees perceive benefits as a right independent of how well the company performs – thus, reducing costs from benefits might lead to employee resentment and dissatisfaction o Employee benefit costs have risen at a much greater rate than employee wages or the consumer price index • Why the growth in employee benefits? o Government impetus  Govt mandates benefits – workers compensation (provincial), employment insurance (federal) and Canada/Quebec Pension Plan (federal)  Most other benefits are affected by laws such as pension benefits acts and human rights acts  Removal of mandatory retirement at age 65 caused the need to revise benefits plans for these ppl o Unions  Fought for the intro of new benefits and the improvement of existing ones o Employer impetus  Rest breaks were implemented in belief that fatigue increased accidents  Many employer-initiated benefits were designed to create a climate in which employees perceived that management was generally concerned for their wellness o Cost effectiveness of benefits  Most employee benefits are not taxable – avoids payment of personal income tax  Many group-based benefits can be obtained at a lower rate than individual employees  Benefit premiums and pension contributions are tax deductible up to limits specified • The value of employee benefits o Medical payments – one of the most important benefits that employees receive o Evidence that employees frequently are unaware of, or undervalue, the benefits provided by their org and benefits are taken for granted o Employees are not really looking for more benefits but rather greater choice in the benefits they receive o Employers are making more serious efforts to increase employee awareness of benefits • Key issues in benefits planning, design, and administration o Benefits planning and design issues  Ensuring that current benefits are adequate in a challenging task  Planning process should include strategies in ensure external competitiveness and adequacy of benefits – either the firm must have a package comparable to survey participants or a sound justification explaining why deviation makes more sense  No magical formula in evaluating benefits adequacy o Benefits administration issues  Who should be protected or benefited? Companies often differentiate treatment based on employment status – all depends on adequacy, competition, and cost effectiveness  How much choice should employees have? Traditionally employees did have choice in their benefits but now several choices are offered – depends on its evaluation of the relative advantage and disadvantages of flexible plans  How should benefits be financed? Non-contributory (employer pays total costs), contributory (costs shared between employee and employer), and employee financed • Factors influencing benefit planning o Employer preferences  Relationship to total compensation costs – benefit costs are only one part of a total compensation package and managers must keep this in mind  Costs relative to benefits – require policy decisions on the level of benefit expenditures that are acceptable in the short and long term – can also compare to costs of competitors – decide who will be contributing to the plan  Competitor offerings – benefits must be externally equitable; policy decision must be made about the position that the org wants to maintain in its absolute level of benefits – conduct benefits survey or purchase data from consulting firm  Role of benefits in attraction, retention, and motivation – employee benefits are widely claimed to help in the retention of workers by tying benefits to seniority – pensions and medical coverage help reduce employee turnover • Benefits might be more valued if there was proof that it increased employee satisfaction – declining satisfaction with benefits is a result of long term changes in the workforce and must approach benefits planning differently • Benefits may have an impact on the bottom line – owning stocks motivates employees to be more productive because part of the reward returns to then in the form of dividends  Legal requirements – vesting – waiting period for entitlement to the employer-paid portion of pension benefits; 2 years of employment and employees become entitled to employer contribution by Canadian law  Absolute and relative compensation costs – total package must be competitive; any changes made must consider the impact on total costs and in relationship to expenditures of competitors o Employee preferences  Fairness – employers with a strong commitment to maintaining a totally or partially non-union workforce will adopt benefits that competitors have adopted to avoid hard feelings from their employees – as long as the need criterion is satisfied, employer is seen as fair  Personal needs of employees – preferences are somehow systematically related to what are termed demographic differences – meaningful differences exists between groups in terms of benefit preferences; OR surveying individuals about needs – development of questionnaire • Flexible benefits plans o Benefit plans in which the employee is provided with a specified amount of money and then chooses which benefits to spend the money on, according to the attractiveness and cost o Employers believe that the advantages far weigh out the disadvantages and there are many cost savings o Increase employee awareness of the true costs of benefits and therefore, increase employee recognition of benefits value o Advantages of flexible benefits programs:  Employees choose packages that best satisfy their unique needs  Flexible benefits help firms meet the changing needs of a changing workforce  Increased involvement of employees and families improves understanding of benefits  Make introduction of new benefits less costly. The new option is added merely as one among a wide variety of elements from which to choose  Cost containment: organizations set dollar maximum. Employee chooses within constraint o Disadvantages of flexible benefit programs  Employees make bad decisions and find themselves not covered for predictable emergencies  Administrative burdens and expense increase  Adverse selection. Employee pick only benefits they will use – high benefit utilization increase costs • Administering the benefits program o Communicating the benefits program  Communication especially regarding retirement plans is important because large number of employees are approaching that stage  Accurate info provided in a timely manner  Employee benefits handbook – description of all benefits, including levels of coverage and eligibility requirements  An org must spell out its benefit objectives and ensure that any communications achieve objectives  The message must be matched with the appropriate medium  Content of the communication package must be complete, clear, and free of the complex jargon o Claims processing  When an employee asserts that a specific event has occurred and requests that the employer fulfills the promise of payment  When claim is denied, benefits administrator must then become a counsellor explaining the equitable and consistent procedures used o Cost containment  Probationary periods – excluding new employees from benefits coverage until some term of employment is completed  Benefit maximums  Coinsurance – percentage of insurance premiums paid for by the employer  Deductibles – specified dollar amount of claims paid by the employee each year before insurance benefits begin  Coordination of benefits – reducti
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