Indirect Compensation and Benefits

Indirect Compensation and Benefits

Chapter Outline

•      Basic Considerations in Indirect Compensation and Benefits

•      Mandated Protection Plans

•      Optional Protections Plans

•      Paid Time Off

•      Other Types of Benefits

Chapter Outline (cont’d)

•      Cafeteria-Style Benefits Plans

•      Legal Issues in Indirect Compensation and Benefits

•      Evaluating Indirect Compensation and Benefits Plans

Chapter Objectives

•      Identify and discuss basic considerations in indirect compensation.

•      Discuss legally mandated protection plans as employee benefits.

•      Describe various optional protection plans as employee benefits.

•      Discuss paid time off as an employee benefit.

Chapter Objectives (cont’d)

•      Identify and discuss various other benefits that some organizations provide for their employees.

•      Describe cafeteria approaches to benefits.

•      Identify and discuss basic legal issues in indirect compensation and benefits.

•      Discuss how indirect compensation and benefits plans are evaluated by organizations.

Basic Considerations in Indirect
Compensation and Benefits

•      Benefits

–  Various rewards, incentives, and other things of value that an organization provides to its employees beyond their wages, salaries, and other forms of direct financial compensation

•      The average U.S. worker spends 40 hours a week at work, spends 1,847 hours a year working, has 23 days off a year, and has mandated benefits costs equal to about 10% of wages.

Purposes of Indirect Compensation
and Employee Benefits

Mandated Protection Plans

•      Protection plans

–  Benefits designed to provide protection to employees when their income is threatened or reduced by illness, disability, death, unemployment, or retirement

•      Unemployment insurance

–  Intended to provide a basic subsistence payment to employees who are between jobs

Mandated Protection Plans  (cont’d)

•      Social Security

–  Originally designed to provide limited income to retired individuals to supplement their personal savings, private pensions, part-time work, and so forth (officially the Old Age Survivors and Disability Insurance Program)

•      Workers’ compensation

–  Insurance that covers individuals who suffer a job related illness or accident

Optional Protection Plans

•      Insurance coverage

–  Has become a standard with most organizations

–  Health maintenance organizations (HMOs)

•   Medical organizations that provide medical and health services to employees on a prepaid basis

Optional Protection Plans (cont’d)

•      Private pension plans

–  Prearranged plans administered by the organization that provide income to the employee at her or his retirement

–  Defined benefit plans

•   The size of the benefit is precisely known and is usually based on a simple formula using input such as years of service

–  Defined contribution plans

•   The size of the benefit depends on how much money is contributed to the plan

Paid Time Off

•      Paid holidays

–  New Year’s Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, Christmas

–  Religious holidays

•      Paid vacations

•      Sick leave

•      Personal leave

Other Types of Benefits

•      Wellness programs

–  Concentrate on keeping employees from becoming sick rather than simply paying expenses when they do become sick

•      Life-cycle benefits

–  Based on a person’s life cycle, including childcare and eldercare

Other Types of Benefits (cont’d)

•      Employee assistance plans (EAPs)

–  Designed to assist employees who have chronic problems with alcohol or drugs or who have serious domestic or personal problems

•      Perquisite (perk)

–  An extra benefit that may or may not have any direct financial value but is considered to be an important reward by employees

Trends in New Benefits Offerings

Cafeteria-Style Benefits Plans

•      The organization establishes a budget per employee.

•      The employee is presented with a list of possible benefits and their costs.

•      The employee chooses benefits.

•      Administration can be costly.

•      Adverse selection can be costly.

•      Employee choices may not be rational.

Legal Issues in Indirect
Compensation and Benefits

•      Qualified benefit plan

–  The employer receives an immediate tax deduction for any contributions made, and the employee does not incur a tax liability on the amount deducted or on any investment returns

•      Vesting rights

–  Guaranteed rights to receive pension benefits

Evaluating Indirect Compensation
and Benefits Plans

•      It is important that the organization offers benefits packages.

•      It is important to assess periodically the extent to which costs are in line.

•      It is important for the organization to communicate effectively what the benefits are.

Employee Awareness of Their Benefits