COMPENSATION 

MANAGEMENT
Brief Notes for Students
HRSB 353

Chapter 13: Benefits

Options
LEARNING OBJECTIVES
1. Explain what benefits are legally required by
employers.
2. List the seven categories of benefits and give
examples of each.
3. Explain the difference between a defined
benefits and a defined contributions program.
4. Discuss cost containment strategies that could
be used with health care benefits.
Categorization of Employee Benefits
1. Legally required payments (employers’ share)
a. OASDI (employer FICA taxes) and railroad retirement
tax
b. Unemployment compensation
c. Worker’s compensation
d. State sickness benefits insurance
2. Retirement and savings plan payments (employers’
share)
a. Defined benefit pension plan contributions (401K type)
b. Defined contribution plan payments
c. Profit sharing
d. Stock bonus and employee stock ownership plans
(ESOP)
e. Pension plan premiums
f. Administrative and other costs
Categorization of Employee Benefits
(continued)

3. Life insurance and death benefits (employers’ share)

4. Medical and medical-related benefit payments
(employers’ share)
a. Hospital, surgical, medical, and major medical
insurance
b. Retiree hospital, surgical, medical, and major medical
insurance
c. Short-term disability, sickness, or accident insurance
d. Long-term disability or wage continuation
e. Dental insurance
f. Other medical insurance / medical benefits
5. Paid rest periods, coffee breaks, lunch periods,
wash-up time, travel time, clothes-change time, get-
ready time, etc.
Categorization of Employee Benefits
(continued)

6. Payments for time not worked

a. Payments for or in lieu of vacations
b. Payments for or in lieu of holidays
c. Sick leave pay
d. Parental leave (maternity and paternity leave
payments)
e. Other (jury duty, military leave, funeral leave)
7. Miscellaneous benefit payments
a. Discounts on goods and services purchased from
company by employees
b. Employee meals furnished by company
c. Employee education expenditures
d. Child care
e. Other
Legally Required Benefits
Workers’
Compensation
Social Security

Unemployment
Insurance

Family and
Medical Leave Act
C.O.B.R.A.
Workers’ Compensation
Laws date back to 1911
Based on the principle of liability without
fault
Employer absolutely liable for providing
benefits to employees that result from
occupational disabilities or injuries
regardless of fault
Employers assume costs of
occupational injuries and accidents
Workers’ Compensation (continued)
Employers pay premium to insurance
company or state fund
Disability must be work related
Benefits include:
medical care
disability income
rehabilitation
death benefits
Commonalities in State Workers’
Compensation Laws
Social Security
The Social Security program provides
a basic foundation of security for
American workers and their families.
For tax purposes, the system is split
into two programs:
 Social Security
 Medicare
 Social Security and Medicare
SOCIAL SECURITY MEDICARE
 Retirement income  Hospital insurance
 Disability benefits (Medicare, Part A)
 Death benefits  Medical Insurance
 Survivor’s benefits (Medicare, Part B)
 6.2% of eligible  1.45% of eligible
earnings up to earnings (unlimited)
 $76,200 (2000)
 Employee and
 $80,400 (2001)
 Employee and
employer funded
employer funded
Unemployment Insurance
Unemployment insurance benefits are
financed by federal and state taxes levied
on employers under the Federal
Unemployment Tax Act (FUTA)
Employers pay 6.2% on first $7,000
earned by each employee ($434)
5.4% is disbursed to state
unemployment commissions ($378)
0.8% for federal admin costs ($56)
Unemployment Insurance (continued)
Each company pays an actual rate
depending on its prior experience with
unemployment (5 year period)
Money held in federal trust for each state
Each state pays benefits (SUTA)
Payments generally continue for 26
weeks
Supplemental unemployment benefits for
an additional 13 weeks
Unemployment Insurance (continued)
Eligibility in most states:
Be available and actively seeking work
Not refuse suitable employment
Not have left job voluntarily
Not be unemployed because of labor dispute
Not have been terminated for gross
misconduct
Have been previously employed in a covered
industry or occupation, earning a designated
minimum amount for a designated period of
time
Consolidated Omnibus Budget
Reconciliation Act (C.O.B.R.A.)
Family and Medical Leave Act
Coverage: Employers with 50 or more
employees
Eligibility: 12 months employment with
employer in which employee works 1,250
hrs
Qualifying events: Under four specific
circumstances
Conditions: Employee must be able to
return to same job or one with equal status
Family and Medical Leave Act (continued)

Health benefits: Continue while

employee is on leave
Exemption for key employees:
Reinstatement to former position may not
be required
Notification: 30 days
Retirement and Savings Plan
Payments

 Defined benefit plans

 Defined contribution plans
 The Employee Retirement
Income Security Act
(E.R.I.S.A.)
Employee Retirement Income Security Act
(E.R.I.S.A.) (1 of 2)
Eligibility: Employees at least 21 years
old and completed one year of service
Vesting: Cliff vs. graded
Year of service: 12 months of
employment with employer in which
employee works 1,000 hours
Fiduciary responsibilities: “Prudent-
person” rule
Employee Retirement Income Security Act
(E.R.I.S.A.) (2 of 2)
Funding requirements: Specified in act
Plan documentation: Summary plan
description distributed to all participants
Reporting: Annual Report Form 5500
filed with IRS
Pension Benefit Guaranty Corporation
(PBGC): Insures payment of certain
pension plan benefits
Characteristics of Qualified Plans
Qualified Plans (continued)
Defined Benefit Plans
Employer agrees to provide a specific level of
retirement pension, expressed as either a:
fixed dollar, or
percentage-of-earnings amount that may vary
(increase) with years of seniority in the company.
Employer finances this obligation by:
following an actuarially determined benefits
formula
making current payments that will yield the future
pension benefit for a retiring employee.
Defined Contribution Plans
Require specific contributions by employer.
Final benefit received by employees is
unknown
Dependent on the investment success of plan
manager
Two popular forms of these plans:
401 (k) plan
Employee Stock Ownership Plan (ESOP)
Profit sharing can be considered a defined
contribution plan if the distribution of profits is
delayed until retirement.
Relative Advantage of Different
Pension Alternatives
 Income Protection
 Disability Protection  Other Forms of Income
 Non-occupationally Protection
related  Severance Package
 Short-term  Supplemental
 Long-term Unemployment Benefits
 Life Insurance
 Typical designs
Flat dollar
Multiples of compensation
 Tax implications
 Life Insurance Protection

Salary continuation
Group life insurance
Dependent group life insurance
Split-dollar plans
Health and Medical Benefits

General Health
Care Cost Control
Strategies

Short & Long

Term Disability

Dental Insurance

Vision Care
Health and Medical Benefits:
Payment Mechanisms
Indemnity (fee for service)
You play - - you pay
Advantages
Greatest freedom of choice for individual
Fewer “middlemen”
Disadvantages
Greatest cost
Over-utilization
Health and Medical Benefits
Payment Mechanisms (continued)
Managed Care
Networks of Providers
Advantages
Less costly
Typically provide greater benefits (including
preventative)
Disadvantages
Under-utilization
Management (utilization review)
Health and Medical Benefits:
Managed Care
Health Maintenance Organizations
(HMO’s)
Two Models
Staff (or clinic) model
Individual provider association (IPA)
Gatekeeper
Primary care physician
 Types of Health Care Funding
 Fully Insured
 Minimum Premium
 Partially Self-Funded
 Administrative Only
 Third-Party Administrator
 Self-Insured
 Health Insurance Purchasing Cooperativ
Controlling Health Care Costs
Change the Delivery System
Let Employees Choose
Redesign the Policies
Promote Wellness
Conduct Careful Reviews
Undertake a Utilization Review
Miscellaneous Benefits
Paid Time Off Payment for Time
During Working Not Worked
Hours

Child Care

Elder Care

Domestic Partner
Benefits
Legal
VisionInsurance
Care
Payment for Time Not Worked

GONE
FISHING
Paid Time Off During Working Hours
Summary
 Employee benefits are now a major
component of doing business.
 Many believe the dramatic growth in benefits
is prohibitive.
 Look for the start of the millennium to be
dominated by cost-saving efforts to improve
the competitive position of American industry.
 A part of these cost savings will come from
tighter administrative controls on existing
benefit packages.
 Another part of these savings will come from
reductions of existing benefits packages.
Review Questions
1. Your company has a serious turnover problem
among employees with fewer than five years’
seniority. The CEO wants to use employee
benefits to lessen this problem. What might you
do, specifically, in the areas of pension vesting,
vacation and holiday allocation, and life insurance
coverage in efforts to reduce turnover?
2. Re-examine your answer to question 1. Instead of
benefits, are there other compensation tools that
might be more effective in reducing turnover?
Review Questions (continued)
3. Why are defined contribution retirement plans
gaining in popularity in the U.S. and defined
benefits plans losing popularity?
4. Is there any validity to the argument that
workers’ compensation and unemployment
compensation create a disincentive to work.
Explain and justify.
5. Some have argued that spending more money
on employee benefits is like throwing dollars
down a black hole. What might be the basis of
this argument?