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.

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 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.

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 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.

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 Figure 13.1: Benefits as a Percentage of
Total Compensation

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 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.

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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.

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Table 13.1: Benefits Required by Law

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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)

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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
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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.
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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.

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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.
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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 no-fault
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.

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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.

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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.

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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.

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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

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 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.

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 Optional Benefits Programs

Group Retirement
Paid Leave
Insurance Plans

Family- Other Quality

Friendly of Work-Life
Benefits Benefits

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Figure 13.2: Percentage of Full-Time Workers with
Access to Selected Benefit Programs

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Optional Benefits Programs:
Paid Time Off
Vacation Paid Time Off (PTO)
Holidays Bank
Sick Leave Most flexible approach
Employer pools pools
Personal Days personal days, sick days,
Floating Holidays and vacation days for
Jury Duty employees to use as the
need arises
Funerals
Military Duty
Time Off to Vote
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Paid time off is a way for employees
to enjoy time with their families and
to refresh their bodies and spirits.

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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.

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Optional Benefits Programs:
Group Insurance
Medical Insurance

Life Insurance

Disability Insurance

Long-Term Care Insurance

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 Medical Insurance

70% of all full-time Additional coverage

employees in the U.S. may include:
receive medical benefits Dental care
Policies typically cover: Vision care
Hospital expenses Birthing centers
Surgical expenses Prescription drug
Visits to physicians programs
Mental Health Parity
Act (1996)

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 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

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 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)
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Figure 13.3:
Health Care Costs in Various Countries

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 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.

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 Disability Insurance

Short-Term Disability Insurance Long-Term Disability Insurance

Insurance that pays a
percentage of a disabled
employees salary as
benefits to the employee
for six months or less.
Insurance that pays a
percentage of a disabled
employees salary after an
initial period and
potentially for the rest of
the employees life.

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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.
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Figure 13.4: Sources of Income for Persons
65 and Older

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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.

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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.
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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.

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 Figure 13.5: Value of Retirement Savings
Invested at Different Ages

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 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) Defined contribution; defined benefit
b) Contributory; defined benefit
c) Defined benefit; defined contribution
d) Defined contribution; non-contributory

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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).

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Optional Benefits Programs:
Retirement Plans (continued)
Vesting Rights Summary Plan Description
Guarantee that when Report that describes a
employees become pension plans funding,
participants in a pension eligibility requirements,
plan and work a specified risks, and other details.
number of years, they will Employers also provide an
receive a pension at individual benefit
retirement age, regardless statement which describes
of whether they remained the employees vested and
with the employer. unvested benefits.

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Optional Benefits Programs:
Family-Friendly Benefits
Family Leave

Child Care Benefits

College Savings Plans

Elder Care

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Figure 13.6: Percentage of Employees with
Various Levels of Child Care Benefits

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Optional Benefits Programs:
Other Quality of Work-Life Benefits
Subsidized cafeterias Tuition reimbursement
On-site health care On-site fitness center
services On-site dry cleaning
Moving and relocation services
expenses Dues for professional
Employee discounts on organizations
products Off-site company
Employee buying recreation area
service Pet services

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 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.

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Table 13.2:
An Organizations Benefits Objectives

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 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.

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 Employee Expectations and Values
(continued)

Organizations can Cafeteria-style plan: a

address differences in
employees needs and
empower their
employees by offering
flexible benefits plans in
place of a single
benefits package for all
employees.
benefits plan that offers
employees a set of
alternatives from which
they can choose the
types and amounts of
benefits they want.

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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.

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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.

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Legal Requirements for Employee Benefits

Benefits required by law

Tax treatment of benefits

Antidiscrimination laws

Accounting requirements

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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.
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 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.

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 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.
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 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.

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 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.
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 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.

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