The Functional Approach In Concept | Employee Benefits

As indicated above, the functional approach essentially is the application of a systematic method of analysis to an employer's total employee benefits program. It analyzes the employer's program as a coordinated whole in terms of its ability to meet employees' (and others') needs and to manage loss exposures within the employer's overall compensation goals and cost parameters. This approach can be useful in overall employee benefit plan design, in evaluating proposals for new or revised benefits, for evaluation of cost-saving proposals, and in effective communication of an employer's total benefits program to its employees. It can be seen that the functional approach, which is essentially a planning approach, fits logically with the total compensation philosophy.

The "package" or total approach to employee benefits is simply the purposeful management of an integrated program. Rather than continually reacting to current fads, outside pressures, and salesmen's pitches, the contemporary businessman relies on fundamental principles of management in developing, organizing, directing, and evaluating systems of employee benefits for his organization.

The functional approach represents such systematic management of the employee benefits function.

 

Need For The Functional Approach

The functional approach is needed in planning, designing, and administering employee benefits for several reasons.

First, in most instances, employee benefits are a very significant element of the total compensation of employees. Benefits have become an important part of the work rewards provided by employers to their employees. Therefore, it is important to employees, and hence to their employers, that this increasingly important element of compensation be planned and organized to be as effective as possible in meeting employee needs.

Second, employee benefits currently represent a large item of labor cost for employers. Depending on the industry, the particular employer, and how employee benefits are defined, benefits may range from less than 21 percent to more than 49 percent of an employer's payroll. Therefore, effective planning and hence avoidance of waste in providing benefits can be an important cost-control measure for employers.

Third, in the past, employee benefits may have been adopted by employers on a piecemeal basis without being coordinated with existing benefit programs, as suggested by the McCaffery quote previously. Thus, some benefit plans just sprouted in every direction. For this reason, it usually is fruitful to apply the functional approach in reviewing existing employee benefit plans to determine where overlapping benefits may exist and costs may be saved, and where gaps in benefits may exist and new benefits or revised benefits may be in order.

Fourth, because of new benefits and coverages, changes in the tax laws, changes in the regulatory environment, and other developments in employee benefit planning have come about so rapidly in recent years, it is important to have a systematic approach to planning benefits to keep them current, competitive, and in compliance with regulatory requirements.

Finally, a given employee benefit or program, such as a pension plan, often provides benefits relating to several separate employee needs or loss exposures. Therefore, an employer's benefit plan needs to be analyzed according to the functional approach so its various benefit programs can be integrated properly with each other.