WHAT TO COMMUNICATE | Communicating the Benefits

The following is what you should communicate to staff in general and to individual employees.

Staff in General

1. The organization's salary policy: This will set out the principles followed in setting pay and benefit levels.
2. The pay and benefits structure: This will define the salary ranges for each grade and the benefits available, including details of the pension scheme and the approach to total rewards.
3. Methods of grading and regrading jobs: Where job evaluation exists, details will be given of the job evaluation scheme, including how evaluations are carried out and the right to appeal against gradings.
4. Salary progression: The method by which salaries are progressed within grades or individually.
5. Incentive/bonus schemes: Details of any incentive, bonus, profit- sharing or share purchase schemes including how bonuses or profit shares are calculated and distributed and the procedures for purchasing shares.
6. Reward systems and organizational change: How remuneration policy will be affected by mergers/take-overs, change in corporate direction and indeed the bad news of liquidation and closures.
   
   

Individual Employees

1. Job grade or job or career family: What this is and how it has been determined.
2. Salary progression: The limit to which their salary can go in their present grade and the means by which they can progress through the grade or pay bands, depending on performance or contribution.
3. Potential: Their potential for higher salaries following promotion, subject to meeting defined performance criteria and the availability of suitable positions. In other words, this information, plus that contained under the heading of salary progression, should create expectations of what staff can get and define the action or behaviour they have to do to get there.
4. Performance management: How performance and potential are focused, managed and assessed, including details of the criteria used, the method of assessment and the right of the employee to know what his or her assessment is and why it has taken that form.
5. Salary levels: The reasons for the level of reward they are getting or the salary increase at the last review and what the employee must do to get more.
6. Benefit statement: The value of the benefits the individual employee receives so that he or she appreciates the level of his or her total remuneration.
7. Total rewards: Wherever possible, it helps to outline what is in the 'value proposition' for employees - linked to organizational values.

In summary, the aim must be to manage the individual's expectations about the range of factors that affect his or her pay and avoid a situation where she or he is overly focused on one factor alone.

As Figure 1 illustrates, the right balance needs to be struck to ensure that everyone understands what affects their pay. In most organizations this tends to be:

• job/role size - grade/level in job family;
• pay markets - for the function by location/industry sector;
• individual performance - the performance, contribution and capability of the individual;
• ability to pay - the ability of the organization/sector to pay premium or closer to average rates of reward.

 

Figure 1: Get the balance right

THE ACCRUED BENEFIT

Under the vesting rules for qualified plans, many employees will be entitled to a benefit from their qualified plan if they terminate employment before retirement. Also, if an employer terminates a plan before all employees have retired, plan participants generally receive the benefits they have earned at that point. Therefore, the plan must provide a means of determining the amount of benefit payable to employees with a given termination date. To do this, the qualified plan benefit is treated as having been earned over the employee's entire period of employment. The amount of benefit earned as of a given date is referred to as the accrued benefit at that date.

Every qualified plan must include a means for determining the participant's accrued benefit. Furthermore, to prevent discrimination, Code Section 411(b) and extensive IRS regulations under Code Section 401(a)(4) require that benefits accrue at minimum specified rates. The purpose of the Section 411(b) benefit accrual rules is to prevent the plan from having an excessive amount of what is known as backloading. An extreme example of a backloaded plan would be one that had a normal retirement age of 65 with a provision that no employee who terminated employment prior to age 63 would receive any benefit under this plan. In effect, all of the benefits under this plan would accrue during the two years between ages 63 and 65. This much backloading is not permitted under current rules. Obviously, the purpose of the accrual rules is to prevent employers from favoring highly compensated employees who are the ones most likely to continue employment to later ages. Incidentally, the benefit accrual rules do not prohibit frontloading—rapid benefit accrual during a participant's earlier years of employment. However, few employers would have any reason for designing a frontloaded plan.

Benefit Accrual Rules
In a defined-contribution plan, a participant's accrued benefit is simply equal to the balance in that participant's account under the plan. The account balance includes employer and employee contributions, forfeitures from accounts of other employees, and investment earnings on the account, less any distributions from the account. If a defined-contribution plan has a nondiscriminatory contribution formula, there normally is no problem of backloading. Consequently, there are no specific rates of accrual required for defined-contribution plans.

For defined-benefit plans, however, benefits must accrue at a rate specified in Code Section 411(b). The plan's accrual rate must be at least as fast as one of three alternative minimum rules:

1. Three Percent Rule. Under this rule, the benefit accrued by a participant during each year of participation must be at least 3 percent of the maximum benefit that a hypothetical participant can accrue by entering at the plan's earliest entry age and participating until normal retirement.
2. 133⅓ Percent Rule. Under this rule, the rate of benefits accrued in any given plan year cannot be more than 133⅓ percent of the rate of benefit accrual during any prior year.
3. Fractional Rule. Under this rule, the benefit the employee has accrued at the date of termination must be proportionate to the normal retirement benefit. The following requirement must be satisfied:

The tendency is for most plans to provide a termination benefit based on the fractional rule, because it is simpler to design and explain to participants.

Fully insured plans—plans that are funded exclusively by the purchase of insurance contracts providing level annual premium payments to retirement and providing benefits guaranteed by an insurance company—are not specifically subject to the preceding three accrual rules if the accrued benefit meets the following tests:

• The accrued benefit is not less than the cash surrender value of the participant's insurance contracts at any time.

• The insurance premiums are paid up, the insurance contracts are not subject to a security interest and there are no policy loans outstanding.

The assumption is that if all these conditions are satisfied, plans funded with insurance contracts will automatically meet or exceed the benefit accrual test. Note that this exception applies only to fully insured plans, not to all plans that use an insurance contract or contracts for funding.