COMPENSATION
Third Canadian Edition
Milkovich, Newman, Cole
9-1
© 2010 McGraw Hill Ryerson
Employee Benefits
 that part of the total
compensation package, other
than pay for time worked,
provided to employees in whole or
in part by employer payments
(e.g., life insurance, pension plan,
workers’ compensation, vacation)
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© 2010 McGraw Hill Ryerson
Why the Growth in Employee
Benefits?
Cost
Effectiveness of
Benefits
Employer
Impetus
Unions
Government
Impetus
9-3
© 2010 McGraw Hill Ryerson
Key Issues In Benefits Planning,
Design, and Administration
Establish plan objectives
Integrate benefits with other
compensation components
Ensure external competitiveness
Ensure adequacy of benefits
Benefits Administration
Who should be covered?
How much choice for employees?
How should benefits be financed?
9-4
© 2010 McGraw Hill Ryerson
Financing Benefits Plans:
Alternatives
 Non-contributory
 employer pays total costs
 Contributory
 costs shared between employer and
employee
 Employee-financed
 employee pays total costs for some
benefits
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© 2010 McGraw Hill Ryerson
Factors Influencing Choice
of Benefits Package
Employer Factors
1.
2.
3.
4.
5.
6.
Relationship to total compensation costs
Costs relative to benefits
Competitor offerings
Role of benefits in attraction, retention, motivation
Legal requirements
Absolute and relative compensation costs
Employee Factors
Benefits
Package
1. Fairness in relationship to what others receive
2. Personal needs as linked to demographic
characteristics such as age
9-6
© 2010 McGraw Hill Ryerson
Flexible Benefits: Advantages
 employees choose packages that best satisfy
their unique needs
 flexible benefits help firms meet the changing
needs of a changing workforce
 increased involvement of employees and
families improves understanding of benefits
 flexible plans make introduction of new
benefits less costly
 cost containment - organization sets dollar
maximum; employee chooses within the
constraint
9-7
© 2010 McGraw Hill Ryerson
Flexible Benefits:
Disadvantages
 employees make bad choices and find
themselves not covered for predictable
emergencies
 administrative burdens and expenses
increase
 adverse selection - employees pick only the
benefits they will use; the subsequent high
benefit utilization increases its cost
9-8
© 2010 McGraw Hill Ryerson
Administering the
Benefits Program
 communicating the benefits program
 claims processing
 cost containment
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© 2010 McGraw Hill Ryerson
Cost Containment
 probationary periods
 benefit maximums
 coinsurance
 deductibles
 coordination of spousal benefits
 administrative cost containment
9-10
© 2010 McGraw Hill Ryerson
Categorization of
Employee Benefits
1. Legally required payments
2. Retirement and savings plans
3. Life insurance benefits
4. Medical insurance
5. Income security benefits
6. Pay for time not worked
7. Miscellaneous benefits
9-11
© 2010 McGraw Hill Ryerson
Workers’ Compensation
 a mandatory, government-sponsored,
employer-paid no-fault insurance plan
that provides compensation for injuries
and diseases that arise out of, and while
in the course of, employment
 provides benefits for
Lost earnings due to temporary disability
Lost earnings due to permanent disability
Health care expenses
Survivor benefits after fatalities
9-12
© 2010 McGraw Hill Ryerson
Workers’ Compensation
 completely employer funded
 regulated by provinces/territories
 compensation varies from 75 to 90
percent of net earnings (two jurisdictions
provide 75 percent of gross earnings)
 cost control is an ongoing concern
9-13
© 2010 McGraw Hill Ryerson
Canada/Quebec Pension Plan
a mandatory, government-sponsored
pension plan for all employed
Canadians
funded equally by employers and
employees
provides benefits upon
retirement
disability
death
9-14
© 2010 McGraw Hill Ryerson
Employment Insurance
 a mandatory government-sponsored plan
for all employed Canadians that provides
workers with temporary income
replacement as a result of employment
interruptions due to circumstances beyond
their control
 funded by employer and employee
contributions
 basic benefit is 55 percent of average
insurable earnings
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© 2010 McGraw Hill Ryerson
Employer-Sponsored
Pension Plans
 plans that provide income to an employee at
retirement as compensation for work
performed now
 Defined benefit plans: employer agrees to
provide a specific level of retirement pension,
the exact cost of which is unknown
 Defined contribution plans: employer
agrees to provide specific contributions but
the final benefit is unknown
9-16
© 2010 McGraw Hill Ryerson
Relative Advantages of
Different Pension Alternatives
DEFINED BENEFIT PLAN
1. Provides an explicit benefit
which is easily communicated
DEFINED CONTRIBUTION PLAN
Unknown benefit level is difficult
to communicate
2. Company absorbs risk
Employees assume these risks
associated with changes in
inflation and interest rates which
affect cost
3. More favourable to long
service employees
More favourable to short-term
employees
4. Employer costs unknown
Employer costs known up front
9-17
© 2010 McGraw Hill Ryerson
Life Insurance
 group life insurance
 accidental death and
dismemberment insurance
dependant life insurance
optional, employee-paid insurance
retiree life insurance
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© 2010 McGraw Hill Ryerson
Employer-Sponsored
Medical Plans
 cover expenses not payable under
provincial/territorial plans
 prescription drug coverage considered
most important benefits by employees
 medical cost control is biggest issue
facing benefits managers today
 cost control through
 deductibles, coinsurance…
 preventive health care/wellness programs
9-19
© 2010 McGraw Hill Ryerson
Income Security Benefits
 Short-term disability plans
 provide continuation of part or all of earnings
during absence due to non-work related illness
or injury
 Sick leave plans
 provide specified number of paid sick days per
month or per year
 Long-term disability plans
 provide continuation of part of earnings during
long-term absence due to non-work related
illness or injury
 claims and costs rising sharply
 psychiatric disabilities fastest-growing
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© 2010 McGraw Hill Ryerson
Pay for Time Not Worked
Paid rest periods, coffee breaks, travel
time…
 vacations
 holidays
 leaves
 bereavement leave
 jury duty
…
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© 2010 McGraw Hill Ryerson
Employee Assistance
Plans (EAPs)
provide confidential counselling
and/or treatment programs for
personal problems including
addiction, stress, and mental health
issues
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© 2010 McGraw Hill Ryerson
Conclusion
 employee benefits are a major cost of doing
business
 cost savings on existing benefit packages
will come from tighter administrative
controls, and from benefit reductions
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© 2010 McGraw Hill Ryerson