Discretionary Benefits and Compensation Systems Review

These flashcards cover key terms and concepts related to discretionary benefits, compensation systems, and associated legislation.

Paid Time Off (PTO) Systems

Systems that provide employees with categories of leave such as vacation, sick leave, and personal days.

Bank PTO

A system that pools all types of paid time off into a single account from which employees can draw for any reason.

Bank PTO Pros

 It builds employer/employee trust by giving workers ownership of their time, delivers a sense of equity, and improves recruitment flexibility.

Bank PTO Cons

 It may encourage "presenteeism" (sick employees coming to work to save their days) and prevents employers from tracking the specific reasons for absences.

Accrual and Eligibility

The method by which PTO is earned based on employee's tenure, hours worked, or level.

Employee Assistance Programs (EAPs)

Programs that help employees cope with personal issues impacting job performance.

Wellness Programs

Initiatives aimed at promoting physical and mental health to lower health costs.

Family Planning/Assistance

These include child care and elder care programs, ranging from simple referral services to company-sponsored on-site centers.

Term Life Insurance

The most common type; it provides protection only for a limited, specified period and expires without value if the employee survives the term.

Whole Life Insurance

These policies do not expire as long as premiums are paid and include a savings or "cash accumulation" component.

Universal Life Insurance

A flexible alternative that combines features of term and whole life, allowing the insured to shift money between the insurance and savings components.

Defined Benefit (DB) Plans

Retirement plans that guarantee a specific monthly benefit at retirement.

Defined Contribution (DC) Plans

Retirement plans where the amount contributed is defined, and investment risk is on the employee.

Asset Allocation

As employees approach retirement, they should shift investments from stocks (high risk/reward) to bonds (lower risk/reward) to protect their balance against market crashes. Target Date Funds automatically adjust this asset mix over time

ERISA (1974)

Legislation regulating employee benefit plans focusing on reporting, funding, and fiduciary responsibility.

Pension Protection Act (PPA) (2006)

Strengthened employee rights by allowing them to sell company stock in their plans and permitting automatic enrollment into DC plans. It also requires companies with DB plans to pay premiums to the Pension Benefit Guaranty Corporation (PBGC) to protect pensions if a company fails.

Components of Social Security

At a high level, it includes Old-Age (Retirement), Survivors’, and Disability Insurance (OASDI), along with Medicare.

Survivor and Disability Benefits

Survivors’ benefits go to unmarried children, spouses caring for children, or dependent parents. To qualify for disability, the condition must be total (preventing work) and expected to last at least 1 year or result in death.

Retirement Age

To claim full Social Security retirement benefits, an individual must reach the full retirement age, which depends on their birth year (increasing toward 67).

Unemployment Insurance

To qualify, an individual must be unemployed through no fault of their own (e.g., a layoff, not firing for cause), be able and available for work, and be actively seeking it. It is financed by employer taxes.

Family and Medical Leave Act (FMLA)

A law that entitles eligible employees to unpaid leave for family and medical reasons.

FMLA Conditions

Eligibility requires working for an employer with at least 50 employees and having provided 1,250 hours of service over the previous 12 months.

FMLA Provisions

Entitles eligible employees to 12 weeks of unpaid leave in a 12-month period for the birth/adoption of a child or a serious health condition of the employee or an immediate family member.

Premium

The fixed fee paid for coverage regardless of usage

Deductible (Healthcare)

The amount the insured must pay out-of-pocket before insurance benefits begin.

Co-insurance

The percentage of covered expenses paid by the insured after the deductible is met (e.g., 20%).

Co-pay

A small fixed fee paid per office visit.

HMO (Health Maintenance Organization)

A type of health insurance plan with lower costs but less flexibility, requiring referrals.

PPO (Preferred Provider Organization)

Higher cost but higher flexibility; employees can see any doctor without a referral, though staying "in-network" is cheaper.

HDHP (High Deductible Health Plan)

Features low premiums but very high deductibles; typically paired with a Health Savings Account (HSA) that allows tax-free savings for medical costs.

Legal Protections

COBRA allows employees to continue health coverage temporarily (usually 18 months) after leaving a job. HIPAA protects the privacy of health information and prevents being denied coverage due to pre-existing conditions.

Stock Options

The right to purchase stock at a specified "strike price".

Restricted Stock Units (RSUs)

Stock shares awarded only after a vesting period is complete.

Stock Appreciation Rights (SARs).

A cash bonus based on the increase in stock price without giving actual shares.

Phantom Stock

A cash bonus based on the total value of the stock itself, usually paid upon retirement

Golden Parachutes

Lucrative pay/benefits provided if an executive is terminated due to a corporate takeover.

Platinum Parachutes

Severance packages provided for most terminations (except fraud) to encourage risk-taking and avoid legal battles.

Clawback Provisions

Clauses allowing a company to reclaim bonuses if misconduct is later discovered.

Key Players

• Consultant: Hired by the CEO to provide data-based recommendations;

• Compensation Committee: Board subcommittee that reviews recommendations and selects the best proposal;

• Board of Directors: Makes the final decision on the pay package.

Agency Theory

Compensation is used to align the interests of the executive (agent) with the shareholders (owners).

Tournament Theory

A theory positing that high CEO pay motivates competition among lower-level managers.

Social Comparison Theory

Compensation is determined by comparing the executive to similar others, often led by board members who are CEOs themselves.

SEC Requirements

Public companies must file Proxy Statements (DEF 14A) disclosing the pay of the CEO and the four other most highly paid executives over a 3-year period.

Dodd-Frank Act

(1) Say on Pay (non-binding shareholder vote),

(2) independence for compensation committees,

(3) disclosure of golden parachutes, and (4) reporting the ratio of CEO pay to the median employee’s pay.