Study Notes on Discretionary Benefits in Strategic Compensation
Strategic Compensation Overview
Focus on discretionary benefits within HR management.
Context: Tenth Edition, Chapter 9, Copyright © 2020, 2017, 2015 Pearson Education, Inc.
Learning Objectives
9.1 Discuss the origins of discretionary benefits.
9.2 Explain the three categories of discretionary benefits.
9.3 Summarize legislation that pertains to discretionary benefits.
9.4 Discuss the fundamentals of designing and planning the benefits program.
9.5 Explain the benefits and costs of discretionary benefits.
Learning Objective 9.1: Origins of Discretionary Benefits
Discretionary Benefits Overview:
In 2017, the average cost was $18,000 per employee.
Discretionary benefits comprised 25% of total payroll costs.
These benefits are provided at the discretion of company management.
Three main categories exist: Protection programs, Paid time off, Services.
Employees often view benefits as entitlements, influenced by rising costs and economic conditions, which lead employers to reconsider who bears these costs.
Employers perpetuate entitlement by providing benefits irrespective of employee performance.
Historical Origins:
The origin of employee benefits can be traced back to retirement plans as early as 1759 for Presbyterian ministers.
In 1875, American Express introduced pension plans.
During WWII, wage controls necessitated the introduction of discretionary benefits as an alternative to salary increases.
Unions played a role in advocating for employee benefits, empowered by the National Labor Relations Act (NLRA) of 1935, which legitimized benefits bargaining.
Increasing workforce diversity has led to a demand for more flexible benefits.
Learning Objective 9.2: Categories of Discretionary Benefits
Three Categories:
Protection Programs:
Aim to provide family benefits, health promotion, and protection against income loss due to unemployment, disability, or serious illness.
Paid Time Off:
Allows employees to take paid leave for vacations, sickness, or personal reasons.
Services:
Includes offerings like tuition reimbursement and daycare assistance for employees and their families.
Detailed Breakdown of Income Protection Programs:
Disability Insurance:
Covers short-term (less than six months) and long-term disability (six months to life).
Short-term benefits range from 60% to 70% of pre-tax income for conditions such as recovery from surgery or hospitalization.
Long-term disability benefits range from 50% to 70% of pre-tax pay, typically starting after a waiting period of 6 to 12 months.
Life Insurance:
Provides payment to beneficiaries upon the employee's death, may include accidental death and dismemberment benefits.
term life insurance: A type of insurance policy that provides coverage for a specific period, paying a benefit only if the insured passes away during that term.
whole life insurance: A type of permanent life insurance that remains in effect for the lifetime of the insured, typically accumulating cash value over time and offering a death benefit regardless of when the insured passes away.
universal life insurance: A flexible premium, adjustable benefit form of permanent life insurance that combines life coverage with a cash value component, allowing policyholders to adjust their premiums and death benefits as needed.
accidental death and dismemberment insurance: Provides additional benefits to policyholders and their beneficiaries in the event of accidental death or severe injury resulting in dismemberment, ensuring financial support in unforeseen circumstances.
Retirement Programs:
Aim to provide post-retirement income to employees and their beneficiaries.
Types of Retirement Plans:
Defined Benefit Plans:
Guarantees retirement benefits determined by a fixed formula based on salary and years of service.
Example: A retirement benefit calculation for Mary, who retires at age 59 after 35 years of service with a monthly salary of $52,500 at 68.20% results in an annual benefit of $35,805.
pension
defines the payout
low risk payout is lower
Defined Contribution Plans:
Contributions are made by employees, employers, or both, into individual accounts.
Benefits depend on the performance of the investments made with these contributions.
Portability allows balances to be transferred as long as vesting criteria are met.
401K
defines what you put into it– it is typically a percentage of your salary set aside for retirement.
higher risk payout is greater
Hybrid Plans:
Combine elements of both defined benefit and defined contribution plans.
Cash balance plans present a defined benefit based on account balance, allowing for lump-sum payouts, thus appealing to mobile workers.
Learning Objective 9.3: Legislation Pertaining to Discretionary Benefits
Internal Revenue Code (IRC):
Governs taxation but promotes specific actions like retirement contributions with associated tax breaks.
Contributions to qualified retirement plans can reduce taxable income for companies and employees.
Employee Retirement Income Security Act of 1974 (ERISA):
Regulates implementation of employee benefit programs including medical, life insurance, and retirement plans, while protecting employee benefits rights.
Qualified vs. Nonqualified Plans:
Nonqualified Plans:
Do not meet ERISA standards and do not permit pretax contributions.
Qualified Plans:
Meet ERISA standards allowing for pretax contributions.
Minimum Standards for Qualified Plans:
ERISA lays down 13 minimum standards concerning participation, coverage, vesting, nondiscrimination, and others, four of which are highlighted:
Participation Requirements: Minimum age of 21 and completion of one year of service.
Coverage Requirements: Must not disproportionately favor highly compensated employees.
Vesting Rules: Companies can choose between cliff vesting (100% vesting after 3 years) or a graduated schedule for vesting rights.
Nondiscrimination Rules: Must not favor high earners in benefits or plan availability.
Pension Protection Act (PPA) of 2006:
Enhances protections for defined benefit and contribution plans and emphasizes automatic enrollment of employees.
Learning Objective 9.4: Designing and Planning the Benefits Program
Design and Planning Considerations:
Coverage Decisions: To include or exclude retirees and probationary employees.
Financing Models:
Noncontributory (employer-funded), Contributory (shared costs), Employee-financed (employee-funded).
Employee Choice: Options such as cafeteria plans allowing workers to customize benefits.
Cost Control Measures.
Effective Communication Strategies.
Example of Financing:
Flexible Spending Accounts, with HCSA max of $2750 and DCSA max of $5000. Employees can save taxes based on their tax bracket (e.g., $5000 x .28 = $1400 tax savings).
Learning Objective 9.5: Benefits and Costs of Discretionary Benefits
Costs and Benefits:
Enhance competitive advantage and attract high-quality employees.
Can influence strategic value behaviors among employees.
Risks undermining elements of strategic compensation plans.
Address diverse workforce needs which help to distinguish a company.
Tax Advantages:
Potential for significant cost savings and enabling different business strategies.
Core—Plus Options:
Allowing flexibility in benefits choice, where employees can opt for additional benefits or cash if they are already covered under existing policies.
Conclusion
The management of discretionary benefits is critical for both employer strategies and employee satisfaction. Understanding these components can define workplace culture and competitiveness in the market.