A marketing research approach can be used for different purposes. Most often it is selected as a way to determine two things:

1. How funds should be allocated to new types of benefits

2. How funds should be used to improve current benefits

This can be for a one-time change in a firm's benefit plan or for changes that are implemented over time. In addition, a marketing research approach can help an employer determine what alternative provisions employees would prefer regarding a specific type of benefit. For example, a firm that allocates additional funds to a long-term disability plan could determine whether employees would prefer a shorter waiting period or an increase in the size of the monthly benefit.

Marketing research techniques must be used with caution. They can have a negative effect on employee morale unless the employer is committed to using their results in benefit decision making. Therefore, this approach should not be undertaken unless the employer intends to base expenditures for benefits on satisfying what employees perceive as their needs. In addition, employees must be made aware that changes in an overall benefit program will be subject to financial constraints and, possibly, trade-offs among benefits.

Although a variety of marketing research techniques can be used in benefit planning, those most commonly chosen fall into three major categories:

1. Personal interviews

2. Simplified questionnaires

3. Sophisticated research methods

Personal Interviews. Personal interviews with employees either alone or in small groups probably constitute the most effective marketing research technique for a small firm or for a benefit program that is limited to a small number of employees. On this scale, it is also the least expensive technique. An advantage of personal interviewing is that it can be used to collect the same type of information as do both simplified questionnaires and sophisticated research techniques. It is important in personal interviewing that the employees feel they can speak candidly. For this reason, it may be desirable to have the interviews conducted by someone outside the firm and to hold group interviews without the supervisor's presence.

Simplified Questionnaires. A simplified questionnaire often has two major parts: one determines benefit preferences, the other determines demographic data, such as age, sex, marital status, years of service, and salary range. The questionnaire is called simplified because employees are basically asked only to indicate and/or rank their preferences. However, the actual analysis of the data that are gathered may be a complex task, and unless a firm is small, it probably will require the use of a computer. It is important to use a clear, brief questionnaire that is not annoying to employees. Consequently, it is best that the questionnaire initially be given to only a few employees in order to test their reactions.

Note that the questionnaire is essentially a structured one and is not open-ended. Employees are requested only to rank their preferences, and they are not given the opportunity to state whether each benefit is important or whether it should be improved. They are also required to make their preferences known regarding possible trade-offs between benefits and pay. Even though the questionnaire is structured, employees are still given the opportunity to make general comments. Such a feature should be incorporated into any questionnaire as a way of letting employees know that their opinions will be heard. It also may result in useful, and sometimes surprising, information for the employer.

Sophisticated Research Methods. One difficulty with simplified questionnaires, and to some extent personal interviews, is that they fail to measure the intensity of employees' preferences. Consequently, some firms have used more sophisticated marketing research techniques in an attempt to measure the degree of importance that employees place on various benefit alternatives. These more sophisticated research techniques are typically used only when specific alternatives have been formulated by the employer. Therefore, they are often used as a follow-up to personal interviews and simplified questionnaires; they frequently also involve additional interviews and/or questionnaires.

Life-Cycle Benefits
The design of employee benefit plans traditionally focused solely on providing active employees with protection against the financial consequences of illness, disability, retirement, and death. Over time, other types of benefits began to be offered, but plan design tended to focus on the employee's being part of a traditional family. Over the last two decades, the demographic makeup of the workforce has changed dramatically. As a result, many employers are frequently taking a life-cycle approach to benefit planning. While the traditional benefits are still part of the core of most overall employee benefit plans, employers are increasingly designing benefit plans with the realization that benefit needs may differ for males and females, and may differ when employees are single, when they have and raise children, when they care for elderly parents, and when they retire.

Intuition would lead one to believe that a life-cycle benefit plan would increase costs because it would tend to provide benefits that would be used by all categories of employees. To some extent this may be true. However, many employers who have taken this approach feel that additional costs are minimal and/or result in offsetting cost savings. For example, flexible work schedules that allow employees to better take care of dependents may cost little or nothing. Other benefits may result in significant cost savings due to less absenteeism and lower employee turnover. In addition, an employer may pass the majority of the cost of some benefits on to the employees who use them. For example, an employer may establish a day care center but charge a fee for its use to offset some of its operating costs. An employer may also make a voluntary long-term care insurance plan available on a payroll-deduction basis. Finally, employees may not automatically have all benefits; they might have to elect the benefits they want with a predetermined amount of employer funds under a cafeteria plan.

Many of the benefits employees want at various stages in their lives are probably fairly obvious. However, many employers use questionnaires and personal interviews to determine these varying needs. One employer, in designing its life-cycle benefit plan, used the life-cycle stages shown in Table 2-1 and found the benefits indicated to be some of those of particular value to persons in that category.

Work/Life Benefits
Employers are increasingly taking a work/life approach to benefit planning. They have realized that employees, particularly in the tight labor market of recent years, are looking for employers that recognize that their employees have lives outside the office. Many of the benefits that appeal to this group of employees are those that have already been mentioned, such as flexible work schedules, child-care plans, eldercare benefits, family leave, and adoption assistance. All of these benefits have seen some growth in prevalence over the past decade.

Employers are also increasingly making on-site personal services available. Some of the more common services are ATMs and other banking activities, access to postal services, travel agencies, and dry-cleaning pickup. Less common are medical and dental clinics, pharmacies, convenience stores, automobile pickup and delivery for oil changes and state inspections, and take-home meals. In some cases, it's merely a matter of providing space for these types of service providers to rent; in other cases, some rental subsidy might be necessary. In a few cases, these services can be provided by the employer. For example, take-home meals might be prepared by the company cafeteria.

WHAT TYPES OF BENEFITS SHOULD BE PROVIDED IN THE PLAN?

A major decision for any employer is what types and levels of benefits to include in an overall employee benefit plan. For those few firms that do not have an employee benefit program, this decision involves choosing which benefits to offer initially. However, in most cases, the decision is ongoing and involves either the offering of new or improved benefits or the redesigning of all or a major portion of the benefit plan. An objective of most employee benefit plans is to meet the needs of employees. But what are these needs? If they vary for different groups of employees, should different benefit plans be established? Or should a single plan be designed in which employees are allowed to choose among alternative benefits?

Determining Needs
Every employer wants its employees to appreciate the benefits that are provided. However, employers are becoming increasingly aware that employee benefit programs are failing to achieve this desired level of appreciation. To some extent, this is due to the fact that as employee benefit plans have grown more comprehensive, employees have begun to take the benefits for granted. In addition, the growing consensus seems to be that the traditional methods of determining the types and levels of benefits to offer have lost much of their effectiveness. These include basing benefits on the following factors:

The employer's perception of the employees' needs. This perception is largely based on the opinions of a firm's top management employees whose compensation is much higher than that of the average employee. Therefore, it is not surprising that many recent studies have shown that management's perception of employees' needs often differs from what the employees themselves feel they need.

What competitors are doing. Too often, the emphasis is placed on having an employee benefit package that is virtually identical to that of the competition, even though the makeup of the work force may be different and the employees may have different needs.

Collectively bargained benefits. Many employers pattern their benefit plans for salaried employees after their negotiated plans for union employees. Again, the needs of salaried employees may be substantially different and may call for a totally different plan.

Tax laws and regulations. Benefit plans are often designed to include those benefits that are best suited to the high tax brackets of top executives. The average employee who is in a modest tax bracket may actually have a preference for certain benefits even though they will result in currently taxable income.

In the last few years, two trends have taken place. First, employers have increasingly taken a marketing research approach to employee benefit planning. The employees' preferences for benefits are determined in a way similar to that in which consumers' demands for products are determined. For the most part, this approach has been used only for nonunion employees, because benefits for union employees are decided by collective bargaining. However, some employers and some unions use this procedure as a guide in their negotiations with union employees. Second, employers have increasingly turned to life-cycle and work/life approaches to benefit planning.

WHAT ARE THE EMPLOYER'S OBJECTIVES?

No benefit plan is properly designed unless it meets the employer's objectives. Unfortunately, these objectives may be unclear or nonexistent, particularly in small firms. However, most large corporations have—and all firms should have—specific written objectives that have been approved by the board of directors or by the owners of the firm. These objectives will vary for each individual organization, depending upon such factors as size, location, industry, the results of collective bargaining, and the philosophy of the employer. Without such objectives, it is difficult for the agent, broker, benefit consultant, or third-party administrator to make recommendations or for the firms's in-house benefit staff (often part of the human resources department) to make decisions.

Types of Objectives
Objectives for benefit plans can be general and part of a firm's overall compensation objective, that is, cash and employee benefits in the aggregate. This may be done to achieve a compensation package that is competitive within the firm's geographic area or industry. Such an average objective usually means that the firm wants both its wages and salaries and its employee benefits to be similar to what the competition is offering its employees. There is usually some, but not much, room for creativity in the design of a group benefit plan, unless the plans of the competition are quite diverse.

Some firms have separate objectives for cash compensation and employee benefits. For example, a growing firm may want its cash compensation to be competitive, but it may want its overall employee benefit plan to be above average in order to attract new employees. A difficulty with this type of objective for the plan designer is determining whether the firm wants all aspects of the employee benefit plan to be better than average or whether it would be willing to accept, for example, an average program of group insurance benefits but a better-than-average pension plan and more vacation time for its employees. Note that most objectives, even when they are very detailed, tend to apply to all employee benefits rather than to specific types.

It has become increasingly common for firms, particularly large firms, to maintain a lengthy and often detailed list of objectives for their employee benefit programs. The following are the objectives of one such firm:

- To establish and maintain an employee benefit program that is based primarily on the employees' needs for leisure time and on protection against the risks of old age, loss of health, and loss of life

- To establish and maintain an employee benefit program that complements the efforts of employees on their own behalf

- To evaluate the employee benefit plan annually for its effect on employee morale and productivity, giving consideration to turnover, unfilled positions, attendance, employees' complaints, and employees' opinions

- To compare the employee benefit plan annually with that of other leading companies in the same field and to maintain a benefit plan with an overall level of benefits based on cost per employee that falls within the second quintile of these companies

- To maintain a level of benefits for nonunion employees that represents the same level of expenditures per employee as for union employees

- To determine annually the cost of new, changed, and existing programs as a percentage of salaries and wages and to maintain this percentage as much as possible

- To self-fund benefits to the extent that a long-run cost savings can be expected for the firm and catastrophic losses can be avoided

- To coordinate all benefits with social insurance programs to which the company makes payments

- To provide benefits on a noncontributory basis, except benefits for dependent coverage for which employees should pay a portion of the cost

- To maintain continual communications with all employees concerning benefit programs

Most lists of objectives contain few, if any, specific details regarding what provisions or what types of benefits should be contained in an employee benefit plan. Rather, they establish guidelines—instead of specific performance goals—within which management must operate. For example, the objectives listed above indicate this firm wants a plan that is understood and appreciated by employees and that is designed with employee opinion in mind. No mention, however, is made of how this is to be done. There may be alternative ways for this firm to achieve its objectives. Similarly, the objectives establish guidelines for the cost of providing benefits. Although the firm wants to have a better-than-average plan, it does not want to be a leader. There is a very specific statement about what the relationship between the cost of benefits for union and nonunion employees should be. However, nothing is mentioned to indicate that the benefits for the two groups must also be identical. If the two groups have different needs, different types and levels of benefits may be desired.

Three additional points about employer objectives should be made. First, as times change, benefit objectives may need revision.

Second, the frequent lack of specific guidelines in benefit objectives gives the in-house benefit staff great latitude to be creative, to come up with innovative solutions to benefit problems, and to respond to the changing benefit environment. Such creativity can often lead to success and financial reward. However, a greater degree of freedom to be creative is also often accompanied by being the scapegoat when benefit decisions do not lead to the desired results.

Third, a firm's primary (and possibly only) objective may be to establish an overall employee benefit plan that channels as large a portion of the benefits as possible to the owner or owners. Although this is a poor objective for an overall plan, it is a reality that must be recognized, most commonly in small firms or in firms that have few owners. Large, publicly held corporations sometimes wish to provide better benefits for their executives than for other employees. These extra benefits are likely to be provided under separate executive compensation plans rather than under the benefit plan that applies to all employees.

Who Should Receive Benefits?
As part of establishing its objectives, an employer must determine its responsibilities to various categories of persons who might be eligible for coverage under the firm's overall benefit program. The list is much longer than one might initially think. It includes the following:

- Active full-time employees

- Dependents of active full-time employees

- Retired employees

- Dependents of retired employees

- Part-time employees

- Dependents of part-time employees

- Disabled employees

- Dependents of disabled employees

- Survivors of deceased employees

- Employees who have terminated employment

- Dependents of employees who have terminated employment

- Employees who are temporarily separated from employment (for example, employees on family leave)

- Dependents of employees who are temporarily separated from em-ployment

Obviously, most benefits are given to employees, and some benefits are given to their dependents, such as medical expense coverage. Whether other groups on the list receive any benefits depends on several factors. These include the attitude of the employer and the degree to which protection is available under other programs, such as Social Security. In addition, federal and state laws play a role. For example, some benefits must be continued because of family leave legislation. In addition, medical expense coverage must be continued in many cases as a result of COBRA.

Employee Benefit Planning and Management

The significant growth in employee benefits requires increasingly complex decisions. Whether these decisions are made by employers providing benefits, unions negotiating for benefits, or employees selecting benefit options, the need for proper benefit planning is crucial. Employee benefit planning is a dynamic process that must continually be reviewed and modified if an overall benefit plan is to meet the changing needs of a changing environment.

If either a single type of employee benefit plan or an overall benefit plan is to be properly designed and managed, many questions must be asked. For example, should the plan reflect the wants of employees or the needs of employees as perceived by the employer? Should it have a probationary period for eligibility? Under what circumstances should the plan be self-insured? These questions are only subparts of six much broader issues:

1. What are the employer's objectives?

2. What types of benefits should be provided in the plan?

3. How should the plan be funded?

4. What provisions for controlling costs should be contained in the plan?

5. How should the plan be communicated to employees?

6. Should administrative functions be outsourced?

Unfortunately for those who like precise answers, plan design and management is an art rather than a science. However, decisions must be made. In some cases, the advantages and disadvantages of the various alternative answers to these questions must be weighed; in other cases, compromises must be made when the answers to two or more questions conflict.

Too often, the proper design of an employee benefit plan is viewed as a one-time decision rather than as an evolving process. However, benefit plans that were appropriate for yesterday's work force may not meet the needs of tomorrow's work force. As times and organizations change, employers' answers to the questions raised may also have to change. For this reason, these issues must be frequently restudied to determine whether a group benefit plan is continuing to meet its desired purpose.

OPPORTUNITIES IN EMPLOYEE BENEFITS

"What opportunities are there for me in employee benefits?" Employee benefits is a broad discipline that offers opportunities for persons with a wide diversity of backgrounds. Some of these are the following:

Marketing majors. An important activity of any employee benefit provider is the marketing of its products and services to employers. These sales activities may be performed by commissioned agents of insurance companies, representatives of employee benefit consulting firms, and salaried employees of Blue Cross and Blue Shield plans or HMOs. Marketing departments of employee benefit providers also design and implement the sales activities of their firms.

Human resources majors. Human resources departments frequently have the task of communicating benefits to employees, and in many firms they may also administer the employee benefit program.

Finance majors. The employee benefit departments of many large employers are under the direction of the finance department. The finance department is often involved in the self-funding of benefits. Finance majors are also needed to determine investment strategies for the billions of dollars invested by retirement plans.

Insurance majors. Many employee benefits are sold by insurance companies.

Accounting majors. Accountants with public and private employers are often involved with employee benefit activities. Accountants in private practice frequently are in a position to advise clients about employee benefit decisions.

Communication majors. As employee benefits become increasingly complex and expensive, employers are demanding better communication of benefits to employees. This communication may involve in-house personnel or materials prepared by employee benefit providers or consulting firms.

Mathematics majors. The proper pricing of employee benefit products is an important function of the actuarial departments of employee benefit providers.

Social science majors. Many job opportunities for social science majors involve interaction with people and the giving of advice about programs to meet their needs. Better advice can be given with an understanding of social insurance programs, wellness programs, employee-assistance programs, dependent-care assistance programs, and the like.

Majors in medical fields. Today it is common for medical practitioners to be employed by benefit providers engaged in managed care activities. In fact, this is one of the growth areas for registered nurses.

The above list is merely meant as an example of the many opportunities available in the field of employee benefits. The providers of employee benefit products and services are diverse and, like any industry, need employees from a wide range of backgrounds.

FACTORS INFLUENCING THE GROWTH OF EMPLOYEE BENEFITS

No one factor can be singled out as the reason for the substantial growth in employee benefits. Rather, this growth has resulted from a combination of factors, including industrialization, the influence of organized labor, wage controls, cost advantages, tax advantages, inflation, and legislation.

Industrialization
During the 19th century, the United States made the transition from an agrarian economy to one characterized by increasing industrialization and urbanization. The economic consequences of death, sickness, accidents, and old age became more significant as individuals began to depend more on monetary wages than on self-reliance and family ties to meet their basic needs. As a result, some employers began to provide retirement, death, and medical benefits to their employees. While benevolence may have influenced the decision to provide such benefits, the principal reason was probably the realization by employers that it was in their own best interest to do so. Not only did such benefits improve morale and productivity, they also reduced employee turnover and the expenses associated with it.

While some of the earlier benefits were paid directly by employers, the development of group insurance enabled these benefits to be funded by systematic payments to an insurance company. As group insurance became more common, employers were faced with adopting new or better plans to remain competitive in attracting and keeping employees. This competitiveness in employee benefits continues to exist.

Industrialization has also led to more benefits, such as Social Security, Medicare, unemployment insurance, and workers' compensation insurance, being provided by government.

Influence of Organized Labor
Since a Supreme Court ruling in 1949, there has been no question about the right of labor unions to negotiate legally for retirement and insurance plans. Although union pressures prior to that time had frequently resulted in the establishment or broadening of employee benefit plans, this ruling strengthened the influence of labor unions.

Labor unions have also influenced benefits for nonunion employees. Some employers provide generous benefit plans in an effort to discourage their employees from unionizing. In addition, employers with both union and nonunion employees often provide the same benefits for the nonunion employees as are stipulated in the union contracts.

Wage Controls
Employee benefit plans grew substantially during World War II and the Korean War when wage freezes were in effect. Although wages were frozen, no restrictions were imposed on employee benefits. Therefore, employee benefits became an important factor in attracting and retaining employees in labor markets characterized by little unemployment. When wage controls were instituted in the early 1970s, however, no unusual growth took place in employee benefit plans because the duration of the controls was relatively short and the unemployment rate was higher than in previous years.

Cost Advantages
Because of the economics associated with group underwriting and administration, benefits can usually be obtained at a lower cost through group arrangements than through separate contracts purchased by individual employees.

Tax Advantages
The Internal Revenue Code also provides favorable tax treatment to employer contributions for certain types of employee benefits. The employer may deduct the contributions as usual business expenses, and, within limits, employees will often have no taxable income that results from employer contributions on their behalf. In addition, payments received from some types of employee benefit plans may be received tax free by employees, even if provided by employer contributions. Benefits from other types of plans may not result in taxable income until payments are actually received. Nevertheless, it should be noted here that the types of employee benefits with the most favorable tax treatment also tend to be the most prevalent.

Inflation
Inflation also affects employee benefits. When benefit levels are related to employees' wages, the level and cost of these benefits will increase as wages increase; when benefit levels are stated as fixed amounts, inflation results in employee pressure for increases. For most employers, the total cost of benefit programs has been increasing at a rate faster than wages, primarily because of the skyrocketing increase in the cost of providing medical expense benefits.

Legislation
Most states have traditionally limited the types of groups that are eligible for group insurance benefits. In addition, the types, and possibly the amounts, of coverage that could be written were also subject to restrictions. In recent years, the majority of these states have liberalized their laws and have allowed more group insurance coverage to be available to an increasing variety of groups.

The federal government and many states also have passed legislation mandating that certain benefits be included in group insurance contracts or that existing benefits be broadened. Examples include legislation requiring benefits for maternity, alcoholism, and drug abuse. These increased benefits have also increased the cost of providing group insurance coverage.

SIGNIFICANCE OF EMPLOYEE BENEFITS

The significance of employee benefits can best be shown by looking at some frequently quoted data of the U.S. Chamber of Commerce and the Bureau of Labor Statistics. These data come from periodic statistics of the two organizations and are generally updated every two years. It often takes a year or more to collect and tabulate these statistics, and the data shown are for the latest survey years available at the time.

U.S. Chamber of Commerce
In a 1998 study of 619 companies, the United States Chamber of Commerce found that the average payment by employers for employee benefits was equal to 37.2 percent of payroll. Of this figure, 8.4 percent of payroll went for the employer's share of legally required social insurance payments, 8.7 percent for payments to private retirement and savings plans, and 8.5 percent for medical and medically related benefits. The remaining 11.6 percent was for all other types of benefits, with paid vacations being the single most costly item in this category. The study showed substantial variations among business firms, with overall percentages ranging from less than 18 percent to more than 65 percent. Large variations were also shown by industry, with public utilities having the highest percentage (43.6) and communications having the lowest (23.9). Within specific industries, benefit percentages tend to be higher for firms with more than 100 employees than for firms with fewer than 100 employees, and nonmanufacturing firms have higher percentages than manufacturing firms. The percentages also tend to be somewhat higher for hourly employees than they are for salaried employees.

In addition to employer costs, employee payroll deductions for benefits amounted to 13.1 percent of payroll in 1998. The majority of this amount was for Social Security and Medicare taxes and contributions to retirement and savings plans.

The Chamber of Commerce study also shows that employees received an average of $14,655 in benefits in 1998. However, there was a significant range, with one-tenth of employees receiving more than $23,842 and one-tenth receiving $7,028 or less. These variations are the result of company, industry, geographic, and employee differences...

DEFINITION OF EMPLOYEE BENEFITS

Before continuing, it is best to define exactly what is meant by employee benefits. The narrowest definition of the term includes only employer-provided benefits for death, accident, sickness, retirement, or unemployment. Even with this approach, there is disagreement on whether the definition should include those benefits that are financed by employer contributions but provided under social insurance programs, such as workers' compensation insurance, unemployment insurance, Social Security, and Medicare. On the other hand, the broadest definition of employee benefits includes all benefits and services, other than wages for time worked, that are provided to employees in whole or in part by their employers.

This text uses a broad definition and defines employee benefits as including benefit plans for employees that arise from the following five categories of employer payments or costs:

Legally required social insurance payments. These include employer contributions to the following programs:

- Social Security

- Medicare

- Unemployment compensation insurance

- Workers' compensation insurance

- Temporary disability insurance

Payments for private insurance and retirement plans. These include the cost of establishing such plans, as well as contributions in the form of insurance premiums or payments through alternative funding arrangements. Benefits are provided under these plans for personal loss exposures such as the following:

- Old age

- Dental expenses

- Death

- Legal expenses

- Disability income

- Property damage

- Medical expenses

- Liability judgments

Payments for time not worked. These include the following:

- Vacations and holidays

-Maternity leave

- Sick leave

- Sabbatical leaves

- Jury duty

Extra cash payments to employees. These are cash payments other than wages and bonuses based on performance. Benefits in this category include the following:

- Educational expense allowances

- Savings plans

- Moving expenses

- Christmas bonuses

- Current profit-sharing payments

- Suggestion awards

Cost of services to employees. These include items such as the following:

- Subsidized cafeterias

- Adoption assistance

- Recreation programs

- Wellness programs

- Clothing allowances

- Day care centers

- Financial counseling

- Transportation benefits

- Retirement counseling

Introduction to Employee Benefits

OBJECTIVES
- Explain the meaning of the term employee benefits.

- Explain the significance of employee benefits in terms of both employer cost and benefits provided to employees

- Identify the factors that have influenced the growth of group insurance and explain the significance of each factor.

- Identify the job opportunities available in the field of employee benefits.

In the early part of the century, very few employees received any compensation from their employers other than direct wages for time actually worked. Employees or their families were responsible for meeting the needs of old age, poor health, and death. Vacations, if allowed at all, were usually without pay.

The 1940s and 1950s witnessed the increasing use and acceptance of employee benefits as a form of compensation in addition to direct wages. During the last two decades, this growth has accelerated as new types of benefits have been added and existing benefits have expanded. Further, while employee benefits were once fairly standardized and free of government regulation, employers must now make more complex decisions regarding the benefits to be provided and the methods with which these benefits are funded.