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Chapter 14
Employee Benefits
Learning Objectives
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Explain why organisations provide benefits to employees.
List the major types of employee benefits.
Understand the requirements for a sound employee benefits program.
Understand the nature of superannuation.
Appreciate some of the current issues in superannuation.
Chapter outline
Chapter fourteen discusses the use of benefits as part of the compensation systems used by organisations. It is
divided into three basic sections that examine the use of benefits, organisation’s objectives when utilising
benefits programs and the types of benefits used.
Introduction
The right combination of benefits can assist an organisation in reaching its strategic business objectives and
provide HR managers with an improved focus and sense of perspective on their organisation’s benefit
programs. Unfortunately, many conventional benefits programs bear little relationship to the strategic
business objectives of the organisation. This is because no identifiable benefit philosophy or objectives exist.
Reactive decisions are made about benefits in response to specific demands and pressures — rising costs,
union demands, taxation changes, and competitive pressures producing a piecemeal benefit program that does
not help achieve or reinforce the organisation’s strategic objectives and culture.
Benefits are discriminatory. The receipt of benefits is normally determined by age, marital status, gender,
seniority, state of health and the like, and not by merit or the value of the individual’s contribution to the
organisation. Consequently, the type, number and proportion of benefits to direct or cash compensation have
an impact on the employee mix.
Unless benefit programs are in harmony with the organisation’s strategic business objectives and culture, their
design may compromise the organisation’s ability to attract and retain the very employees needed to achieve
the organisation’s strategic business objectives. Poor design can mean that benefit programs may neither
improve employee motivation nor be cost effective. This inhibits the organisation’s long-term
competitiveness and ability to attract and retain staff.
Benefit plan objectives
To ensure that benefit program design fits with the organisation’s strategic business objectives and culture, the
human resource manager needs to know how much the organisation wants to spend, how they want to divide
up compensation packages, and how the current and proposed benefits support the organisation’s culture. The
answers to these questions help the human resource manager in designing a benefits program by focusing
attention on plan objectives, cost containment and relevance.
Growth of employee benefits
Traditionally, employee compensation consisted primarily of direct or cash compensation. Benefits now cost
at least 30 per cent of the payroll and form a similar, significant component of total compensation. Despite this
escalating expenditure, few Australian organisations have pro-actively managed their benefit programs.
Taxation
Compensation in Australian organisations has been driven by the need for tax minimisation. The punitive tax
rates on wages and salaries have placed ever-increasing pressure on employers to allow employees to sacrifice
their wages and salaries for a non-cash benefit.
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Union pressure
Unions have been in the vanguard of seeking new and improved benefits for their members. Annual leave,
sick leave, maternity leave, long-service leave, payment of union dues, provision of uniforms and safety
clothing and retirement benefits are all examples of benefits sought by unions.
Status
Some fringe benefits are highly prized as status symbols and can act as powerful motivators.
Fringe benefits tax
On 1 July 1986, the former Labor government introduced a fringe benefits tax (FBT). This was specifically
designed to tax benefits that in the past had escaped the income tax net. Fringe benefits tax is payable on the
following benefits:
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motor vehicles
expense payments
airline transport
living-away- allowances
other benefits.
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low-interest loans
goods and services
housing and board
debt waiver
Major employee benefits still exempt from FBT include employee amenities, employee share acquisition
schemes, superannuation contributions, workers’ compensation and medical treatment, occupational health
and counselling and safety awards.
Flexible benefit plans
Most organisations have a varied employee population. Differences in age, sex, marital status, number of
dependants, financial position and personality make for different benefit needs. To address this, some
organisations offer a system of flexible or cafeteria-style benefits. Such programs allow employees to select
the particular benefits that match their individual needs. Cafeteria plans can be administratively complex as
constant monitoring and updating is required.
Types of employee benefits
Organisations provide many non-monetary benefits to their employees. These enhance the attractiveness of
the organisation as a place to work and are generally administered by the human resource department.
Group life insurance - The purpose of group life insurance is to provide financial protection for the
employee’s dependants upon his or her death.
Health care insurance - Although Medicare provides basic health protection, some organisations offer
supplementary health benefits. Generally, this takes the form of added medical and hospital benefits, plus
assistance with dental, optical and paramedical costs.
Payment for time not worked - This category includes annual leave, annual leave loadings, long-service leave,
paternity leave, sick leave, maternity leave, jury duty, military service, bereavement leave, compassionate
leave, public holidays, education leave and leave for trade union training.
Workers’ compensation insurance - All organisations in Australia are legally obliged to have their employees
covered by workers’ compensation insurance to give them protection against the costs of medical care and loss
of income caused by a workplace injury or illness.
Total and permanent disability insurance - Some organisations provide benefits in the event of the employee’s
total and permanent disability.
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Child-care - The demographics of the Australian work force suggest that as more and more women enter
employment, demands for employer-provided child-care will increase.
Elder-care - Because the population is ageing, caring for older relatives is becoming more common.
Employee assistance programs - Employee assistance programs (EAPs) have become more widespread as
more organisations recognise that their success depends on the health and wellbeing of their employees.
Traditional services offered by EAPs include counselling on drug and alcohol abuse, marital and family
problems, financial problems and time management.
Preventive health programs - Many organisations now realise that health and fitness are not just a fad and that
healthy employees are more productive
Flexible work schedules - Flexible work schedules are designed to provide employees with a choice in the
hours that they work. They also permit the organisation to respond quickly to changes in the work force and to
satisfy customer demands for increasing information and 24 hour-a-day savings. The major types of flexible
working schedules are: Variable day, Flexitime Variable week, Maxiflex, Job sharing, and Permanent
part-time.
Miscellaneous benefits - Miscellaneous benefits include share purchase plans, profit sharing, income
protection, savings and thrift plans, employee loans, travel insurance, frequent flyer points, tuition refund,
study leave, sabbatical leave, employee discounts, payment of union dues, paid rest periods, free clothing,
travel time, wash up time, canteens and free parking.
Retirement benefits
Retirees from the Australian work force have usually depended on the Federal Government’s age pension for
their financial security. However, the cost burdens associated with this, and the ageing of the Australian
population, have seen an ever-increasing push by Labor and Coalition governments toward privately funded
superannuation. The result is that, today, less than 30 per cent of employees expect the age pension to be the
prime means of funding their retirement.
Although it is estimated that over 90 per cent of Australian workers are eligible to receive some form of
superannuation, the adequacy of the actual benefit payable is too low to provide an adequate retirement
income (this is especially true for blue-collar workers and women). Superannuation in Australia is complex
because many of the changes introduced.
Federal Government objectives about superannuation, however, are clear:
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to encourage employees to provide for their own retirement rather than to rely on the age pension.
to minimise the losses of tax revenue brought about by the concessional treatment of superannuation.
Payment of benefits
Superannuation benefits in Australia have traditionally been in the form of a lump-sum payment in the private
sector and a pension in the public sector. Changes in the taxing of lump-sum benefits have initiated moves
towards all superannuation benefits being paid in the form of pensions. Nevertheless, most superannuation
payouts remain in the form of a lump sum. Human resource managers are experiencing increasing pressure to
restructure compensation and benefit packages to try to accommodate conflicting demands. Executives, in
particular, feel frustrated because they have regarded a lump-sum payment at retirement as a form of
compensation for the years of long hours, stress and dislocation of family life. Finally, the superannuation
problem is further complicated by the number of extremely generous public sector superannuation schemes
that have created a highly inequitable situation for private sector employees.
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Rationale for superannuation
Superannuation is regarded as a gratuity from a grateful employer in recognition of an employee’s long and
faithful service, a form of deferred income, and a moral obligation of employers.
Types of retirement plans
Defined benefit plans - Defined benefit plans pay out a predetermined amount either as a lump sum or as a
monthly pension on the employee’s retirement. These plans give employees certainty as to their precise
entitlement on retirement. Contributions are determined actuarially and plan formulas are geared to retirement
benefits rather than contributions.
Defined contribution plans - These plans, sometimes called accumulation plans, calculate the employee’s
retirement benefit on the basis of the accumulated contributions and superannuation fund earnings at the time
of retirement. That is, the final benefit is the sum of all contributions plus interest earned. The benefit may be
paid in the form of a lump sum or a pension (via the purchase of an annuity). Defined contribution plans are
fully funded while defined benefit plans require actuarial calculations to determine the amount required to
meet promised benefit levels.
Issues in superannuation
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Retirement age
Size of benefits
Early retirement
Vesting
Occupational superannuation
AIDS and superannuation
Women and superannuation
Summary
Employee benefits are a rapidly growing part of an employee’s total compensation. Social trends, government
legislation, union pressure, taxation and competitive forces all make benefits an increasingly attractive but
expensive form of compensation. Most employers offer a wide range of benefits. Some benefits, such as
annual leave, are required by law, while other benefits, such as child-care, are provided voluntarily by some
employers.
To be of value, benefits must be related to the organisation’s strategic business objectives and to employee
needs. Cost-effective benefits that are preferred by employees are in the organisation’s long-term competitive
interest as they can be a positive recruiting aid and motivational force. The strategic use of benefits can thus
help give an organisation a competitive edge by enabling it to better attract and retain people with the skills it
needs to achieve its key business objectives.
Terms to identify
benefits
cafeteria benefits
defined benefit plans
defined contribution plans
disability insurance
early retirement
employee assistance programs (EAP)
flexitime
fringe benefits
fringe benefits tax (FBT)
non-contributory superannuation
portability
preventive health programs
superannuation
vesting
workers’ compensation
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REVIEW QUESTIONS
1.
Define benefits. What are the general purposes of benefits?
Benefits are supplements to wages and salaries which are paid in kind to employees. They are part of the
income package and are usually not contingent upon performance, as are bonus and incentive schemes.
One purpose of benefits is to satisfy the organisation's objectives. Another is to help attract, motivate and
retain the right mix of employees.
The right combination of benefits can assist an organisation in reaching its objectives and provide HR
managers with an improved focus and sense of perspective on their organisation's benefit programs.
Unfortunately, many conventional benefits programs bear little relationship to the strategic objectives of the
organisation. Equal pay for equal work, and pay for performance philosophies, are promoted by many
organisations. The reality however is that many benefit programs are in direct conflict with these principles.
For example, employees with families are frequently provided with extra coverage under medical and health
benefit programs; superannuation entitlements are extended to all irrespective of performance, and the
allocation of company cars, club memberships, payment of union dues and so on are linked to status not
performance.
Benefits are intended to reflect merit or value to the organisation. Consequently, the type, number and
proportion of benefits to direct or cash compensation has an impact on the employee mix.
2.
In your opinion, what employee benefits best meet the needs of employees? Why?
Students' answers to this question will revolve around the identified needs of the employees. An organisation
should have a portfolio of benefits that can meet the needs of a wide range of employees. Employees' needs
may change over time. For example, marriage and the birth of children will mean a change in the relevance
and importance of different benefits for different employees.
3.
Should retirement be compulsory? Explain the arguments for and against.
It is illegal to tell someone that they cannot work. The issue should really be whether people can take their
superannuation money and use it, rather than whether they should retire or not. Some issues that students
should consider are:
Retirees from the Australian workforce have in the main depended on the Commonwealth Government's age
pension for their financial security. However, the cost burdens associated with this, and the aging of the
Australian population, have seen an ever-increasing push by the Commonwealth Government toward
occupational superannuation. To this end, retirement should be compulsory so that the accrued superannuation
money can be used, and that reliance on the taxpayer can be reduced.
Commonwealth Government objectives with regard to superannuation are clear:
• firstly, to encourage employees to provide for their own retirement rather than rely on the age pension,
and
• secondly, to minimise the losses of tax revenue brought about by the concessional treatment of
superannuation.
Superannuation was once regarded as a gratuity from a grateful employer in recognition of an employee's long
and faithful service. Payments were provided at management discretion, with none or few employee rights.
This reward philosophy viewed superannuation as a means of retaining key personnel. Personnel who were
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not valued by management, and employees who quit or were discharged, were regarded as undeserving of
superannuation benefits.
Over the years, competitive, social, government and union pressures brought about increasing acceptance of
the view that superannuation is a form of deferred income. This earnings philosophy of superannuation is
gaining increasing acceptance.
Still another view is that superannuation reflects a moral obligation of employers to provide for their
employees' financial wellbeing in old age. This moral philosophy regards employers as being obligated to
provide realistic retirement benefits. Advocates of this approach see it as a means of keeping age pension costs
contained. To this end, retirement should be compulsory.
Sixty-five years for men and sixty for women have been the traditional retirement ages in Australia. This
difference is seen by some as discriminatory, so there have been pressures to either reduce the retirement age
for men or increase the retirement age for women. To this dilemma has been added the matter of forced
retirement, which can be regarded as age discrimination. Given that the Australian workforce is greying, the
raising of the forced retirement age to seventy is likely to be subject to review.
Retirement before the age of sixty is generally viewed as early retirement. Some superannuation plans allow
employees to retire with reduced benefits as early as ten to fifteen years before the standard retirement age.
Because employees can take their superannuation payout and go back to work, there is an argument for
compulsory retirement.
Major reasons for early retirement are to allow for lifestyle and to permit organisations to open up jobs for
younger employees. Another reason is that early retirees in receipt of a lump-sum payment have been able to
manipulate their financial circumstances so they can later qualify for the age pension. This "double dipping"
adds greatly to the costs of providing age pensions and reduces the effectiveness of superannuation as a means
of providing for employee retirement. The removal of old-age pensions would mean that it is ethically
impossible to implement any compulsory retirement scheme.
A further problem relating to early retirement is the serious skill shortages that can result. The greying of
Australia's academics, for example, will see large-scale retirements during the coming decade. It is predicted
that this will result in a shortfall of between 8500 and 12,500 academic staff over the next several years. A
slight reduction in demand for University places in the 1994 academic year has lessened this issue somewhat,
but the problem is still valid. This is an argument against compulsory retirement.
4.
What are the pros and cons of ‘cafeteria’ benefit programs?
Most organisations have a varied employee population. Differences in age, sex, marital status, number of
dependants, financial position and personality make for different benefit needs. To address this, some
organisations offer a system of flexible or cafeteria-style benefits. Such programs allow employees to select
the particular benefits that match their individual needs. Each employee is allocated a sum of money that can
be used to purchase specific benefits from among those provided by the organisation. This enables employees
to develop benefit plans that suit their lifestyle.
While having this obvious advantage, cafeteria plans can be administratively complex as Constant monitoring
and updating is required. Moreover, employees may fail to choose those benefits that are truly in their best
interest and then blame the organisation. Finally, trade unions often do not like cafeteria plans, seeing them as
a management effort to restrict benefits and shift the cost to employees. Even so, the potential gains in terms of
employee satisfaction and motivation appear sufficiently attractive to warrant the attention of the human
resource manager.
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What can an employer do to better inform employees about their benefits?
5.
Apart from normal communication channels like company newsletters, employers can use HRM activities to
better inform employees about their benefits. At selection time, the benefit program can be detailed to
employees. Similarly, at performance (salary) appraisal time, the issue of employee benefits can be discussed.
Finally, matters pertaining to benefits can be included in job evaluations. Employers should consult the
employees to determine the employees' needs with relation to benefits. Employers should be proactive in this
regard, and custom tailor the benefit program to meet the needs of the employees. Some other issues identified
in the text are:
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Conduct a "community survey".
Avoid imitating a competitor's program without first appraising its adaptability to your own
conditions.
Benefits and services must be custom tailored.
Ensure that services are in accord with the needs and desires of employees.
Ensure that employees will support the program willingly, sharing part of the costs, if necessary.
Provide an annual statement of the costs of all benefits and services to every employee on an
individualised basis.
Ensure that all employees, particularly supervisors, are well-versed with the organisation's benefits
and services.
Evaluate benefits and services periodically, altering or up-dating them according to changing needs
and conditions.
Communicate the total benefit program to employees.
What factors have contributed to the growth of fringe benefits?
Traditionally, employee compensation has consisted primarily of direct or cash compensation. This in turn has
been supplemented by a limited range of fringe benefits which were of minor value. Today, all this has
changed. Benefits now cost at least 30 per cent of payroll and form a similar significant component of total
compensation.
Some factors contributing to the growth of benefits in Australian organisations are:
Taxation : Compensation in Australian organisations over the last twenty-five years has been driven by the
need for tax minimisation. The punitive tax rates on wages and salaries have placed ever-increasing pressure
on employers to introduce more and more tax-free benefits such as additional holiday and sick leave, fully
maintained cars and non-contributory superannuation. As employees and unions become less and less
enamoured with taxable cash payments, organisations have been obliged to expand the range of benefits.
Union pressure : Unions have been in the vanguard of seeking new and improved benefits for their members.
Annual leave, sick leave, long-service leave, payment of union dues, provision of free uniforms and safety
clothing and superannuation are all examples. This trend is likely to continue as unions aggressively pursue
improved benefits because of the clamp on wages suffered under the Accord.
Status : Some fringe benefits are highly prized as status symbols and can act as powerful motivators. The
company car was once considered the ultimate fringe benefit. It now has become so common that it has lost
much of its former prestige. Replacing it in the status stakes are service agreements, entertainment or hostess
allowances and first-class business travel.
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What is the difference between a defined contribution and defined benefits retirement plan?
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Defined-benefit and defined-contribution superannuation plans are the two major approaches used by
employers to provide retirement benefits for their employees. In recent times Defined-benefit plans have
undergone a decline in popularity however, there are indications that this trend may be about to reverse.
Defined-benefit plans pay out on the employee's retirement a predetermined amount either as a lump sum or as
a monthly pension.
Defined-benefit plans give employees certainty as to their precise entitlement on retirement. Contributions are
determined actuarially, and plan formulas are geared to retirement benefits rather than contributions.
Defined-contribution plans (sometimes called accumulation plans) calculate the employee's retirement benefit
on the basis of the accumulated contributions and superannuation fund earnings at the time of retirement. That
is, the final benefit is the sum of all contributions plus interest earned. The benefit may be paid in the form of
a lump sum or a pension (via the purchase of an annuity). Defined-contribution plans are fully funded while
defined-benefit plans require actuarial calculations to determine the amount required to meet promised benefit
levels.
8.
How can an organisation ensure its benefit program is integrated with its corporate and HRM
objectives?
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Generate an identifiable benefits philosophy, or set of objectives. Be proactive in this regard, don't just
react to external pressures.
Ensure that the benefit program does not reinforce behaviour that is contrary to the corporate and HRM
objectives; e.g. certain entitlements should not be extended to all irrespective of performance, and the
allocation of company cars, club memberships, payment of union dues and so on should not be linked
to status but rather to performance.
Determine how much does the organisation desires to spend on total cash and non-cash compensation.
Calculate the proportion of total compensation that should be given as pay or benefits.
Determine the total cost that the organisation is prepared to pay for a benefits program.
Determine what benefit costs (if any) will be shared with employees.
Ascertain which specific benefits are to be included in the organisation's benefit program, the need for
such benefits, and whether they are the benefits that employees want.
Work out the purpose of the benefits, whether they satisfy the organisation's objectives, if they will
they help attract, motivate and retain the right mix of employees.
Determine which employees should receive or be offered benefits, and if the benefits are to be granted
via seniority, performance or any other criteria.
What role do employee benefits play in employee motivation?
Benefits are part of a remuneration package available to employers to attract and motivate employees. The
special value of benefits as a motivational tool is that they are flexible. Employers can draw upon a wide range
of possible benefits to offer employees. This means that the organisation is flexible in being able to meet the
needs of its employees.
10.
What role do you think benefits might play in the employment decision of a job applicant who is a:
(a)
22-year-old BBA graduate?
(b)
48-year-old electrician?
(c)
married 25-year-old secretary?
(d)
35-year-old professional accountant with two children?
(e)
55-year-old sales representative?
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Students need to recognise that the spectrum of available benefits will appeal to these people differently.
Some suggestions to incorporate into discussion might be:
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The graduate will probably need money more than other benefits. Moreover, the graduate will be at a
lower level of income than someone who is more advanced in their career. Hence, the graduate will
not be so keen on avoiding income tax by having benefits as part of the remuneration package.
The career stage of each person will mean that they will probably determine the degree to which they
need benefits rather than wages or salary. The later the career, the more that benefits will be desired.
The marital and family status of each person will also have an impact. With children, benefits can be
more attractive. Some examples might be child-minding facilities, life insurance, health insurance, or
assistance with schooling.
Some jobs lend themselves more to benefits than others. The sales representative might sell products
than are readily consumable by families. Discounted goods or services are valuable benefits that can
be offered. For example, an airline executive can get cheap flights for the family for holidays.
As one nears a retirement age, superannuation can be more appealing as a benefit.
Status benefits might be more appealing to the manager or the accountant.
A motor vehicle for personal use might be feasible for the electrician or the sales representative.
DIAGNOSTIC MODEL
1.
Identify and discuss the key factors from the diagnostic model (figure 1.11) that have significance for
employee benefits.
Students might identify political influences as being crucial contemporary influences in Australia. There has
for some time been political influence to reduce the incidence of benefits as components of the compensation
package. By the same token, the legal influence of taxation law in Australia has been a cause of the
preponderance of various components of benefit compensation as a means of avoiding taxation from other
sources. Retirement benefits and superannuation, for instance, are both legal and political issues that will have
significant influence for some time to come. Cultural variation exists in terms of the acceptability and
importance of various components of the benefit compensation mix. The 'Introduction' to the chapter
elaborates on some of these issues.
2.
Explain the impact that employee benefits may have on the development, reward, maintenance and
departure of an organisation’s human resources.
Benefits will have the same sort of impact as other elements of the compensation mix. Benefits are essentially
reward and maintenance activities.
3.
Discuss the impact that employee benefits policies and practices may have on commitment,
competence, cost effectiveness, congruence, adaptability, performance, job satisfaction and employee
motivation.
Commitment will be a function of the congruence between the compensation mix and the needs of the
employee. Commitment will also be affected by the employee's perceived equity of his or her compensation
mix. The discriminating nature of benefits means that there is the opportunity for employees to perceive the
equity of their situation differently from other people. Cost effectiveness will be enhanced by adopting the
most tax effective benefits program. Once again, performance is a function of the behaviour that the benefits
program reinforces. For example, a concentration on superannuation and retirement benefits will reinforce
longevity; while benefits that are tied to seniority will reinforcement advancement but not necessarily
competence or performance.
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Soapbox
There are seldom clear answers to these questions. The idea is to stimulate debate as much as to determine an
answer.
ETHICAL DILEMMA
The gift voucher
1.
As HR manager for the company, what would you recommend management do?
Some benefits have a use-by date. The acceptability of employee benefits are a function of the values and
attitudes of the society within which they are embedded. It is probably time to review this particular benefit,
and if necessary to adopt new employee benefits that have more universal acceptance.
2.
What ethical issues, if any, are raised in this case?
Benefits are discriminatory. The receipt of benefits is normally determined by age, marital status, gender,
seniority, state of health and the like, and not by merit or the value of the individual’s contribution to the
organisation. Consequently, the type, number and proportion of benefits to direct or cash compensation have
an impact on the employee mix.
Unless benefit programs are in harmony with the organisation’s strategic business objectives, their design may
compromise the organisation’s ability to attract and retain the very employees needed to achieve the
organisation’s strategic business objectives. Poor design can mean that benefit programs may neither improve
employee motivation nor be cost effective. This inhibits the organisation’s long-term competitiveness.
Budget funds allocated for improvement of the superannuation plan at the expense of a child-care benefit
program may, for example, make the organisation’s benefits package more appealing to older male employees
and less appealing to younger female employees.
CASE STUDY
It’s time to review our benefits
1.
2.
Assume you are part of the HR team assigned by Sam and Margaret to survey the present range of
benefits offered by the company.
(a)
Design a questionnaire to survey:
(i)
employee understanding of the organisation’s present benefits program
(ii)
the ranking employees give to existing or alternative benefits
(iii) changes to the benefits program employees would like to see introduced (e.g.
improvements in administration, type of benefit offered etc.).
(b)
Using your questionnaire, conduct a survey of the class members or of employees in a local
organisation.
(c)
Using Maslow’s hierarchy of needs (see pp. 401–2) analyse the employees’ rankings of
benefits.
Prepare a report for Sam and Margaret on your findings.
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It is difficult to prepare feedback on a task such as this. Instructors will need to rate each student
suggestion on its merits.