Factors Affecting Reward Management Policy And Practice

Reward management policy and practice are subject to a number of influences. As summarized below, these consist of contextual factors arising from the internal and external environment and conceptual factors relating to theories and beliefs about strategic management, total reward, human capital management, the factors affecting pay levels, motivation, engagement, commitment and the psychological contract.

The Internal Environment

The internal environment consists of the organization's culture and its business, technology and people.

The External Environment

The features of the external environment are competitive pressure, globalization, and changes in demographics and employment. 

Strategic Management

Strategic reward is an aspect of strategic management the purpose of which, is to 'elicit the present actions for the future' and become 'action vehicles – integrating and institutionalizing mechanisms for change'. Strategic management as 'the set of decisions and actions resulting in the formulation and implementation of strategies designed to achieve the objectives of an organization'.

However, strategic management in reality is not necessarily a formal, well-articulated and linear process. Strategies may be formulated as they are used, strategy emerges over time in response to evolving situations. He believes that business strategy is best regarded as a 'pattern in a stream of activities'. This applies equally to reward strategy.

Total Reward

Total reward policies provide for a holistic approach to be adopted to reward management, which ensures that all aspects of reward are treated as a coherent portfolio of policies and practices.

Human Capital Management

Human capital management (HCM) is concerned with obtaining, analysing and reporting on data, which informs the direction of value-adding people management strategic, investment and operational decisions at corporate level and at the level of front-line management. An HCM approach to reward management will assemble data on the effectiveness of reward management policies but in a more advanced form will attempt to assess the impact of remuneration policies on people and the business, thus informing strategic plans.

The Factors Affecting Levels of Pay

The factors affecting levels of pay influence pay decisions regarding the rate for the job, market rates and pay reviews.

Motivation

Motivation theory is important as a guide to the use of contingent pay and the non-financial elements of total reward.

Engagement and Commitment

The concepts of job engagement and organizational commitment also provide guidance on total reward policies and contingent pay.

The Psychological Contract

It is necessary to understand what the psychological contract is and its significance when formulating and implementing reward policy as a key aspect of relationships with employees.

PREPARING FOR GROWTH | Reward Policies for New, Start-up and High-growth Organizations

PREPARING FOR GROWTH

Whatever the basic components of the reward system in a 'start-up' they should be developed with an eye to appropriateness in a larger organization. Particular attention will be needed in these areas:

• Pensions: schemes for small partnerships/groups of professionals or the self-employed will not easily adapt to cover 140 to 200 employees after three years. Professional advice will be needed to achieve this.
• Pay relativities: starting on a 'spot salary' basis is logical, but internal relativities should always be defensible as the organization grows.
• Executive share options/employee share schemes: should be capable of extension - again an area for good professional advice.
• Performance rewards: need to relate to the milestones in the business plan and be based on achievement of agreed objectives/performance standards. Chief executive-driven discretionary bonuses are typically suspect unless the boss really is in the 'tough but fair' (or preferably just the fair) category.

Reward Policies for New, Start-up and High-growth Organizations

WHERE TO START

The objectives of a reward system designed to meet the needs of a business start-up are to:

• Attract and keep people anxious to make the organization grow and flourish.
• Reward the risk of coming into a new venture with high rewards and generally a share in the business if the risk pays off - for those who have real control over development. It is more difficult and probably unrealistic to reward support and more junior staff on a 'high-risk' basis.
• Provide a sensible basic salary that is reasonably competitive with the market for most staff and highly competitive if rare skills have to be brought in. This is one time to pay at the top of the market.
• Lock people in to give business stability - typically with generous share schemes for senior executives and an all-employee SAYE share scheme SIP or profit sharing for everyone else.
• Minimize overheads by keeping benefits to a decent basic core until there is some 'fat' in the system or where competitive pressure indicates additions to the various benefits.
• Pay out bonuses or provide non-cash rewards (have a party!) when key milestones in the business plan are successfully achieved
• Recognize that in the early days office accommodation may be at best basic and demonstrate willingness to improve conditions as soon as practicable (fresh flowers in an aged but clean reception area - or even in the staff lavatories - can have a significant effect on the way the company is perceived).

SETTING THE STYLE OF REMUNERATION POLICY

The principles affecting boardroom pay are generally the same as those described elsewhere in this book for all employees. What is different is the public visibility of pay decisions and the fact that salary policy for directors is usually an indication of corporate culture. Statements in many company annual reports confirm this, especially when an organization decides to change, and usually sharpen, rewards at the top. The press has always reacted badly to major pay hikes - playing on the politics of envy and the so-called 'fat cats' syndrome. More recently, major institutional shareholders have taken considerable interest in the link between executive rewards and corporate success and the press in the UK is alays prepared to make adverse comments on what are perceived to be excessive pay increases for boards, when increases for the rank and file have been kept at a minimum in times of low inflation.

The way in which boards of directors are paid tends to reflect the pay philosophy of the organization as a whole. Boards that have adopted and believe in the value of incentives, for instance, will push the concept of performance-related pay down through the whole organization. Those who choose to reinforce other values such as loyalty and commitment may place more emphasis on these - but they may, of course, offer performance rewards too.

Critical to the success of the remuneration policies for more junior staff is the level at which boardroom pay is set in relation to the competition. Boards, especially in family companies where remuneration does not come from basic salary alone, do not always appreciate that the level of their basic pay sets the ceiling below which all other salaries generally have to fit. Failing to recognize this or allowing for necessary exceptions can create 'headroom' problems, which have an impact on both recruitment and retention.

Also potentially damaging are salary levels which employees perceive as excessive in relation to their own rewards. High boardroom pay can and should be an outward sign of corporate achievement. But the taste can go sour if employees perceive that their pay is 'just a cost to be controlled' and that there is no potential share for them in the organization's success. It is no coincidence that many companies that have gone for generous bonus or incentive schemes or executive share options at the top have also opted to introduce performance-related pay further down, perhaps in addition to some form of all-employee profit sharing or share scheme. Such actions have not just tempered possible accusations of executive greed but have given everyone a potential share in success. They may also reassure shareholders that good and competitive remuneration practice has been introduced at all levels. It is, after all, in the interests of shareholders that the employees and the board are motivated to achieve the same goals and to deliver corporate success.

TRENDS IN EMPLOYEE BENEFITS POLICY

The Hay Survey of Employee Benefits was first published 30 years ago, in 1974. Since then, the survey has highlighted significant changes in benefits provision in UK organizations, driven by a combination of legislative and environmental changes. For instance:

§  The rising prevalence of the mobile telephone has seen the proportion of employers offering some form of home telephone rental subsidy dropping from 84 per cent in 1990 to 28 per cent in 2003.

§  In 1970, 59 per cent of organizations offered a defined benefit pension scheme based on 1/60th of final pay for each year of service. This figure increased to over 90 per cent during the 1980s and 1990s, but is now falling as organizations close defined benefit schemes to new entrants and offer defined contribution schemes instead.

§  Only 2 per cent of organizations reported offering any form of childcare facilities or contribution to childcare costs in 1990. This has risen to 16 per cent, with childcare vouchers being a popular benefit to include in flexible benefit schemes.

Perhaps the greatest change has been in company car provision. The median level at which status cars are provided has fallen steadily from 800 Hay units in 1974 to just over 500 Hay units in 2003. There is also greater flexibility around the choice of car, as evidenced by the 2003 Hay Benefits Survey, which reported that 67 per cent of status company car drivers can pay to 'trade up' to a more expensive vehicle and 90 per cent can 'trade down', with 52 per cent receiving a cash payment in compensation. In 1994, only 30 per cent of respondents allowed employees to 'trade up', and just 11 per cent offered a cash payment to employees who elected to take a cheaper car. However, not everything changes. New car prices remained static between 2000 and 2003, resulting in little movement in either typical lease prices or car allowances during this time.

The main trends in benefits policy are:

§  continued simplification of benefit packages;

§  increased emphasis on individual need and individual choice, particularly evidenced by flexible and voluntary benefit schemes

§  more attention paid to communicating the benefits available to employees.

BENEFITS POLICIES | EMPLOYEE BENEFITS

Policies on employee benefits need to be formulated in the following areas:

§  Range of benefits provided: some benefits, such as pensions and holidays, are expected, others, such as permanent health insurance, are optional extras.

§  Scale of benefits provided: the size of each benefit, taking into account its cost to the company and its perceived value to employees. Note that the perceived value of some benefits such as company cars or pension schemes (particularly in the case of older employees), can be very different from their actual cash value.

§  Proportion of benefits to total remuneration: in cash terms, a benefit such as a pension scheme can cost the company between approximately 5 and 15 per cent of an employee's salary. A decision has to be made on the proportion of total remuneration to be allocated to other benefits which incur expenditure of cash by the company. This policy decision is, of course, related to decisions on the range and scale of benefits provided, and it can be affected by decisions on allowing choice of benefits and on the distribution of benefits. Some companies try to move towards a 'clean cash' policy which minimizes the number and scale of fringe benefits.

§  Allowing choice: benefits will be most effective in the process of attracting and retaining employees if they satisfy individual needs. But individual needs vary so much that no benefits package or single item within the package will satisfy all employees equally. Younger employees may be more interested in housing assistance than a company pension plan. Some employees have ethical or political objections to medical insurance schemes. Not everyone wants a company car - especially if they live in an inner city area and have a spouse with a better car entitlement. Many people may prefer cash to an automatic benefit which is not precisely what they want. Allocation of benefits: policy on the allocation of benefits determines the extent to which it is decided that a single status organization should be created. If the policy is to have a hierarchy of benefits, then the allocation of these at different levels has to be determined, usually in terms of broad bands of entitlements - typically called benefit grades.

§  Harmonization: in the new flatter organizations, where multiskilling is prevalent and new technology is eliminating the old distinction between white- and blue-collared workers, harmonization of benefit packages is increasingly taking place. The objective is to increase unity of purpose and improve team work by abolishing invidious distinctions between benefits, rewarding different levels of responsibility and contribution by pay alone. Single status companies are becoming much more common. Full harmonization means that there are no distinctions at any level in the hierarchy between the benefits provided, which may vary only with length of service or specific market practice.

Partial harmonization may provide the same basic benefits in some areas such as pensions, holidays, sick pay and redundancy for white- and blue-collared staff, but have a hierarchy of benefits above this base according to job grades. These benefits could include company cars, topped-up pension schemes or medical insurance.

§  Market considerations: whatever degree of choice or harmonization is decided upon, the precise arrangements will always be affected by market considerations. It may only be possible to attract and retain some key staff by, for example, offering a company car in line with what other organizations are doing for similar jobs. To attract a senior executive, it may be necessary to offer him or her a special pension arrangement - especially if he or she is earning over the Finance Act 1989 'earnings cap' (£102,000 for the 2004/05 tax year). As in all aspects of pay, market considerations and the need to offer competitive packages may have to override the principle of equity.

§  Government policy: it is essential, when reviewing benefit policies, to monitor tax legislation in order to assess the relative tax efficiency of benefits and to keep employees informed of the implications for them. For example, since 2001 the government has substantially changed the basis of company car taxation to encourage individuals to drive more environmentally friendly cars and to discourage the provision of free private fuel.

§  Trade unions: trade unions are increasingly concerned with the whole remuneration package and therefore may be involved or ask to be involved in negotiating the provision and level of benefits. Many companies, however, resist negotiating such items as pensions, although they will be prepared to consult unions or staff associations on benefit arrangements and do sometimes have trade unionists as trustees of the pension scheme.

THE GOVERNMENT'S ROLE—PENSION POLICY ISSUES

Management objectives are one major factor in pension design; the other is the government regulatory structure. This section discusses the development of the government's role in this area.

Most employees covered under an employer-sponsored retirement plan are covered under what is known as a qualified retirement plan. A qualified plan is one that receives certain valuable federal tax benefits, but its design, funding, and administration must meet an extraordinarily complex set of federal statutory and regulatory requirements. Most federal regulation in this area specifically preempts state and local regulation. The tax benefits from such plans to both employer and employee are generally (though not always) adequate to justify the inconvenience of this severe regulatory regime. A nonqualified plan is any other retirement or deferred compensation plan. Nonqualified plans are subject to much simpler federal regulation, along with less favorable tax treatment. Nonqualified plans are used primarily for executive compensation arrangements that replace or supplement qualified plan coverage for a selected group of highly compensated executives.

The government's role in the retirement income area has been dictated primarily by historical factors. Beginning in the late 19th century, the economy of the United States changed fairly rapidly from predominantly agricultural to predominantly industrial and service oriented. Coinciding with this change—and probably in response to it—the large, supportive extended family of the agricultural economy was largely replaced by smaller, more fragmented family units. The shift away from agriculture reduced the amount of economically useful work available to older people, and family structural changes reduced the amount of family support for the aged.

Because of these economic and social trends, people generally must make specific plans for their retirement. This is a difficult matter for most individual employees to do alone and, consequently, employer-sponsored pension plans have become increasingly important.

In the 20th century, federal government involvement in retirement plans for the aged also greatly expanded. The federal government's involvement is twofold. For most people, the most obvious federal government program in this area is the Social Security system adopted in the 1930s to provide direct benefit payments to the aged. But even before the Social Security system was adopted, the federal government became involved in a more traditional way by measures designed to encourage the private pension system.

Governments tend to be reluctant to adopt direct payment arrangements for dependent individuals, particularly in the United States—a reflection of the generally conservative social values of the American public. Historically, governments have tended to look first at private organizations to act in this area. This is one reason why charitable institutions, such as orphanages and hospitals, have for centuries been granted various forms of tax exemption.

In the tradition of encouraging private initiatives, in the 1920s the federal government began encouraging private, employer-sponsored retirement plans by providing two kinds of tax benefits. First, pension funds were made tax exempt under the Revenue Acts of 1921 and 1926. Then, in the Revenue Act of 1928, employer contributions to plan funds were made currently deductible by the employer, even though benefits were not paid to employees until later years. These basic provisions still apply and form the basis for today's vast federal regulatory scheme for qualified plans.

The embryonic private pension system of the 1920s declined significantly during the depression of the 1930s. This was one reason for the adoption of the Social Security system. However, since the 1940s, private pension plans have revived to an enormous degree. Assets in private pension plans now amount to more than three trillion dollars, which constitutes a very substantial portion of the nation's entire capital.

Because of the large sums involved, any tax benefits provided to qualified plans cost the government a great deal in lost tax revenues; the government estimate is well over $75 billion annually. This large "tax expenditure" is often given as a primary justification for the exhaustive scheme of government regulation that now applies to qualified pension plans. Fundamentally, the argument is that the large tax expenditure is designed to help prevent individuals from becoming dependent on the government in retirement. Consequently, the government attempts to make sure that plan benefits go where they are most needed so that this tax expenditure is cost effective. Much pension regulation is aimed at discouraging plans that primarily benefit highly-compensated employees who have other sources of retirement income. Other rules are intended to assure that the large sums set aside for plan benefits are managed in the exclusive interest of plan participants and beneficiaries.

In practice, the government frequently adopts new or modified statutes and regulations relating to pensions without clear or articulated long-range policy objectives. The absence of a coherent federal retirement policy is currently a critical federal policy issue. Current issues in pension regulation include those covered in the following sections.

Tax Revenue Loss

At times, revenue-raising needs outweigh retirement policy issues in Congress. The tax benefits for qualified plans cause a substantial apparent decrease in tax revenues. The criticism is also frequently made that too much of the tax benefit goes to high-income individuals who don't need government help. Whatever the merits of this argument, it is indisputable that "fine tuning" the rules to reduce tax benefits for certain plan participants can increase tax revenues in the short run, without the political pain of visibly "raising taxes." The need to raise revenue has motivated many recent changes in the qualified plan law, and it probably will be a factor in future legislation. Changes of this type are often enormously complex as a result of the need to carefully target the group whose benefits are to be reduced, typically the owner-employees of closely held businesses. Revenue-motivated changes are often criticized as resulting in bad retirement policy.

Discrimination in Favor of Highly Compensated Employees

Although a major thrust of virtually all qualified plan legislation since the 1940s has been to discourage employers from discriminating in their plans in favor of highly compensated employees, a considerable amount of such discrimination is still possible, as discussed throughout this text. Because of this, much qualified plan legislation has been designed to reduce the "tax shelter" aspects of qualified plans, particularly those for smaller businesses whose owner-employees receive substantial benefits. Many of the most complex and awkward provisions of the law, such as the top-heavy rules, were designed in this vein.

Seemingly, it would be easy to eliminate the discrimination problem by simple, appropriate benefit or contribution limits. However there is a counter-vailing policy consideration. Small businesses, collectively, employ a large and increasing segment of the work force. Owners of these businesses may not be interested in maintaining a qualified plan for their employees unless the plan provides substantial, and possibly disproportionate, benefits for the owners themselves. This policy issue, therefore, involves tension between tax-benefit equity and efficiency on the one hand, and the need to encourage small business retirement plans on the other. No simple resolution of this is likely in the near future, and complex legislative compromises on this issue will probably continue to emerge from Congress.

Encouraging Private Saving

Surprisingly, in view of the trillions invested in pension plans, relatively little policy emphasis has been given to the role of the qualified plan rules in encouraging private savings. One problem is that policy makers agree neither on the appropriate level for private savings nor on whether government policy should encourage savings rather than allowing the free market to set the level. Another factor is that economists are divided about the efficacy of the qualified plan provisions in encouraging savings. Some economists argue that these plans merely displace private saving that would take place in any event. Nevertheless, the savings issue is an ongoing factor in the policy debate.

Interest-Group Pressures

As the foregoing discussion indicates, retirement policy poses difficult problems even if viewed from a neutral intellectual viewpoint. The actual political climate, of course, is not neutral. The qualified plan business is large and involves many firms and individuals. Most of these organizations eagerly and frequently convey their views to Congress in great technical detail. This complicates the resolution of issues and makes change more difficult.

Mandatory Retirement Plan Coverage

A presidential commission formed in the late 1970s to study pension policy recommended the establishment of a Minimum Universal Pension System (MUPS) for all workers, to be funded by employers at an initial rate of at least 3 percent of payroll. The MUPS benefit would be completely portable from job to job. In general, the MUPS approach is not popular with employers and benefit plan designers, who prefer the flexibility of current rules; at the present time, Congress is not considering it seriously.

Age and Sex Discrimination

Age and sex discrimination have not been addressed by Congress specifically as retirement plan issues. However, recent federal legislative and regulatory activity related to employment discrimination in general has affected retirement plans

Group Long-Term Care Policies | GROUP LONG-TERM CARE INSURANCE

Most of the early group long-term care policies were designed for specific large employers, and much variation existed. For the last few years, most insurance companies have had a standard group long-term care product, which in virtually all cases is consistent with the provisions in the Long-Term Care Insurance Model Act of the National Association of Insurance Commissioners. The result is that group policies tended to be comparable to the broadest policies sold in the individual marketplace.

Effect of Health Insurance Portability and Accountability Act

The tax treatment of long-term care insurance was made more favorable by HIPAA. Because favorable tax treatment is given only if long-term care insurance policies meet prescribed standards, the nature of most long-term coverage has changed. In most cases, the imposition of federal standards results in broader coverage for consumers. However, Congress seems to have been concerned with the revenue loss associated with this tax legislation. As a result, policies that are modified to comply with the federal standards may in some cases actually provide more limited coverage than has been previously required in several states, particularly with respect to qualifying for benefits.

It should be emphasized that the long-term care changes in the act are primarily changes in the income tax code. States still have the authority to regulate long-term care insurance contracts. They have no obligations to bring state rules and regulations into conformity with these tax changes. However, all states allow "qualified" contracts so that consumers can obtain the new tax benefits.

In the individual marketplace, there are both "qualified" contracts and contracts that do not meet the new HIPAA rules—called nonqualified contracts—and there is some debate over which type of contract is better. However, in the group marketplace, most, if not all, of the contracts are qualified.

Eligibility for Favorable Tax Treatment. The act provides favorable tax treatment to a qualified long-term care insurance contract. This is defined as any insurance contract that meets all the following requirements:

• The only insurance protection provided under the contract is for qualified long-term care services.

• The contract cannot pay for expenses that are reimbursable under Medicare.

• The contract must be guaranteed renewable.

• The contract does not provide for a cash surrender value or other money that can be borrowed or paid, assigned, or pledged as collateral for a loan.

• All refunds of premiums and policyholder dividends must be applied as future reductions in premiums or to increase future benefits.

• The policy must comply with various consumer protection provisions. For the most part, these are the same provisions contained in the NAIC model act and already adopted by most states. However, the new federal act requires the issuer of any level-premium contract to offer a nonforfeiture benefit that can take the form of one of the following: paid-up insurance, extended term insurance, a shortened benefit period, or any similar benefit allowed by regulations that might be issued.

The act defines qualified long-term care services as necessary diagnostic, preventive, therapeutic, curing, treating, and rehabilitative services, as well as maintenance or personal care services that are required by a chronically ill individual and are provided by a plan of care prescribed by a licensed health care practitioner.

A chronically ill person is one who has been certified as meeting one of the following requirements:

• The person is expected to be unable to perform, without substantial assistance from another person, at least two activities of daily living (ADLs) for a period of at least 90 days due to a loss of functional capacity. The act allows six ADLs, and a qualified long-term care policy must contain at least five of the six. These ADLs are eating, bathing, dressing, transferring from bed to chair, using the toilet, and maintaining continence. (The secretary of health and human services is permitted to prescribe regulations so that a person having a level of disability similar to the level of disability of a person who cannot perform two activities of daily living would also be considered chronically ill.)

• Substantial services are required to protect the individual from threats to health and safety due to substantial cognitive impairment, even if the person can perform all other ADLs.

Federal Income Tax Provisions. A qualified long-term care insurance contract is treated as accident and health insurance. Therefore any employer contributions are deductible to the employer and do not result in any taxable income to an employee. Benefits received under a group plan are received tax free by an employee with one possible exception. Under contracts written on a per diem basis, proceeds are excludable from income up to $190 per day in 2000. (This figure is indexed annually.) Amounts in excess of $190 are also excludable to the extent that they represent actual costs for long-term care services.

Coverage cannot be offered through a cafeteria plan on a tax-favored basis. In addition, if an employee has a flexible spending account for unreimbursed medical expenses, any reimbursements for long-term care services must be included in the employee's income.

With some exceptions, expenses for long-term care services, including insurance premiums, are treated like other medical expenses. That is, self-employed persons may deduct a portion of premiums paid, and persons who itemize deductions can include the cost of long-term care services, including insurance premiums, for purposes of deducting medical expenses in excess of 7.5 percent of adjusted gross income. However, there is a cap on the amount of personally paid long-term care insurance premiums that can be claimed as medical expenses

Policy Characteristics

Eligibility for Coverage. The typical eligibility rules (that is, full-time employee, actively at work, and so on) apply to group long-term care policies. At a minimum, coverage can be purchased for an active employee and/or spouse. Many policies also provide coverage to retirees and to other family members such as children, parents, parents-in-law, and, possibly, adult children. There is a maximum age for eligibility, but it is frequently as high as age 85 and may be higher.

Cost. As previously mentioned, the cost of group long-term care coverage is almost always borne by the employee. Initial premiums are usually based on five-year age brackets and increase significantly with age. For example, one plan has an annual premium of $300 for persons aged 40 to 44 and $975 for persons aged 60 to 65. Once coverage is elected, premiums remain level and do not increase when a person enters another age bracket. Coverage is guaranteed renewable, so premiums can be increased by class.

Under some plans, premiums are payable for life. Under other plans, premiums are higher but cease at retirement age. Such a plan is analogous to a life insurance policy that is paid up at age 65. Virtually all plans contain a waiver-of-premium provision that becomes effective when a covered person starts to receive benefits.

Levels of Care. There are several types of care that group long-term care policies can provide. All group policies cover the first three items on the following list, and most policies can provide coverage for all the listed items. However, to receive coverage for some benefits, such as home health care, a covered person might have to elect the benefit and pay an increased premium.

• Skilled-nursing care, which consists of daily nursing and rehabilitative care that can be performed only by or under the supervision of skilled medical personnel and must be based on a doctor's orders.

• Intermediate care, which involves occasional nursing and rehabilitative care that must be based on a doctor's orders and can be performed only by or under the supervision of skilled medical personnel.

• Custodial care, which is primarily to handle such personal needs as walking, bathing, dressing, eating, or taking medicine and can usually be provided by someone without professional medical skills or training.

• Home health care, which is received at home, and includes part-time skilled nursing care, speech therapy, physical or occupational therapy, part-time services from home health aides, and help from homemakers or chore workers.

• Adult day care, which is received at centers specifically designed for the elderly who live at home but whose spouses or families are not available to stay home during the day. The level of care received is similar to that provided for home health care. Most adult day care centers also provide transportation to and from the center.

• Care coordination, which includes the services of a licensed health care practitioner who can access a person's condition, evaluate care options, and develop an individualized plan of care that provides the most appropriate services.

• A bed reservation benefit, which continues payments to a long-term care facility for a limited time (such as 20 days) if a patient must temporarily leave because of hospitalization. Without a continuation of payments, the bed may be rented to someone else and unavailable on the patient's release from the hospital.

• Respite care, which allows occasional full-time care at home for a person who is receiving home health care. Respite-care benefits enable family members (or other persons) who are providing much of the home care to take a needed break.

Some policies provide other types of benefits. These include, for example, the purchase or rental of needed medical equipment, emergency alert systems, and assisted-living benefits for facilities that provide care for the frail elderly who are no longer able to care for themselves but do not need the level of care provided in a nursing home.

Benefits. Benefits are usually limited to a specific dollar amount per day, with $50 to $150 being common. A few plans allow participants to select varying benefit levels (for example, $50, $75, $100, $150, or $200 per day) when coverage is initially elected. Benefits may vary by level of care, with the highest benefits being provided for skilled nursing care and the lowest level for home health care and/or adult day care if they are covered. For example, home health care benefits are often paid at one-half the level of custodial care benefits. Annual respite care benefits are usually limited to some multiple, such as 20, of the maximum daily benefit. Most states require that insurance companies offer protection against inflation, usually in the form of benefits increasing periodically based on some index such as the consumer price index. However, inflation increases are often capped at some annual maximum, such as 3 percent.

While a few group long-term care plans provide benefits for an unlimited duration, most limit benefits to a period of time, ranging from three to seven years, or to some equivalent dollar maximum. It should be noted that most persons who enter nursing homes either are discharged or die within two years. However, it is not unusual for stays to last seven years or longer. As in the case of disability income insurance, benefits are often subject to a waiting period, which may vary from 10 to 150 days with 90 days being most common.

Some policies provide for a full restoration of benefits if a covered person has recovered and not been receiving long-term care benefits for a certain period of time, often 180 days. In the absence of such a provision, maximum benefits for a subsequent claim are reduced by the amount of any benefits previously paid.

Eligibility for Benefits. Eligibility for benefits under group long-term care policies is based on meeting the requirements of a chronically ill person as previously described. With respect to ADLs, most policies specify that the covered person be unable to perform at least two out of six ADLs (without substantial assistance from another person) for at least 90 days. However, some policies use a criterion of two out of five ADLs.

There is a second criterion for eligibility, which if satisfied results in the payment of benefits even if the ADLs can be performed. This criterion is based on cognitive impairment, which can be caused by Alzheimer's disease, strokes, or other brain damage. Cognitive impairment is generally measured through tests performed by trained medical personnel.

Because eligibility for benefits often depends on subjective evaluations, most insurance companies use some form of case management. Case management may be mandatory, with the case manager determining eligibility, working with the physician and family to decide on an appropriate type of care, and periodically reassessing the case. Case management may also be voluntary, with the case manager making recommendations about the type of care needed and providing information about the sources for care.

Underwriting. If a group is large enough, coverage is provided on a guaranteed-issue basis for employees who are actively at work. Other categories of eligible persons and employees of small groups are usually subject to individual underwriting, in a manner similar to that in the marketplace for individual long-term care insurance.

Unlike medical expense insurance, a long-term care policy usually does not contain a preexisting-conditions provision. There is little need for such a provision because insurers are required in most states to underwrite at the time coverage is written and are not allowed to use post claims underwriting. If properly underwritten at that time, claims within usual preexisting-conditions periods are very unlikely to occur. In addition, waiting periods for benefits often serve a similar purpose.

Exclusions. Several exclusions are found in group long-term care policies:

• War

• Institutional care received outside the United States

• Treatment for drug or alcohol abuse

• Intentionally self-inflicted injury

• Attempted suicide

• Confinement or care for which benefits are payable under workers' compensation or similar laws

• Confinement or care for which the covered person or the covered person's estate is not required to pay

In contrast to many older individual policies, group contracts have not been written to exclude organic-based mental diseases such as Alzheimer's disease.

Renewability and Portability. Group long-term care plans are guaranteed renewable. If a participant leaves employment, the group coverage can usually be continued on a direct-payment basis, under either the group contract or an individual contract.