Indirect Compensation and Benefits
• 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
• 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
– 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