DEVELOPING EMPLOYEE BENEFIT STRATEGIES - KEY FACTORS

The key factors to be taken into account in developing employee benefit strategies are that they should:

§  be an integral part of the total reward management strategy of the organization, which in turn should specifically support the achievement of its business objectives;

§  add value to basic remuneration and performance-related pay policies by extending the purely financial provisions of these policies into areas where the company will benefit from providing additional rewards and which will support the achievement of employees' specific needs;

§  be in line and supportive of the culture of the organization and its value system;

§  demonstrate to employees that they are members of a caring and enabling organization which is concerned in highly practical terms with meeting their needs for security, support and other forms of help so that they are able really to give of their best;

§  meet the needs of the organization to increase the commitment of its members, to develop their identification with its objectives and to increase unity of purpose;

§  meet the real needs of individual employees rather than those needs which management believes they should have;

§  help the organization to recruit and retain high-quality and well-motivated staff by being competitive in the market place;

§  ensure that benefits are cost effective in the sense that the increase they produce in commitment and improvement in recruitment and retention rates justify their cost;

§  take account of relative tax efficiencies in structuring the package;

§  establish an appropriate degree of flexibility in operating the benefit package;

§  provide a measure of individual choice to employees;

§  aim to avoid an over-divisive approach which places employees into clearly defined 'have' and 'have not' categories;

§  bear in mind the importance of the non-tangible benefits as well as those which provide extra remuneration or financial assistance;

§  be creative - not simply offering what competitors offer but devising new approaches to structuring the package and to providing individual benefits which are tailored to the strategic needs of the organization (like giving secretaries having to cope in poor, if temporary, office conditions, fresh flowers on their desk every week in recognition of their commitment and tolerance of the environment).

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.

Title I: Protection of Employee Benefit Rights

Title I of ERISA placed primary jurisdiction over reporting, disclosure, and fiduciary matters in the Department of Labor. The Department of the Treasury is given primary jurisdiction over participation, vesting, and funding. During the first years of ERISA, this "dual jurisdiction" led to a number of problems, which were addressed in 1979 by Reorganization Plan Number 4, discussed later in this chapter. As a result of reorganizations and administrative experience under ERISA, many requirements have been adjusted, resulting in a reduction of the regulatory burden.

Reporting and Disclosure

Plan sponsors are required to provide plan participants with summary plan descriptions and benefit statements for the plan. Participants also are provided access to the plan's financial information. These documents are to be written in "plain English" so they can be easily understood.

Plan sponsors file an annual financial report (Form 5500 series) with the IRS through the Employee Benefit Security Administration (EBSA), which is made available to other agencies. In addition, sponsors must file amendments when modifications to the plan are made. Taken together, these provisions seek to ensure that the government has accurate information on employer-sponsored plans.

Fiduciary Requirements

Plan sponsors are subject to an ERISA fiduciary standard mandating the plan be operated solely for the benefit of plan participants. The fiduciary standard, or "prudent man standard," requires the plan fiduciary perform duties solely in the interest of plan participants with the care a prudent person acting under like circumstances would use. This means any person who exercises discretion in the management and maintenance of the plan or in the investment of the plan assets must do so in the interest of the plan participants and beneficiaries, in accordance with the plan documents, and in a manner that minimizes the risk of loss to the participant. The standard applies to plan sponsors, trustees, and co-fiduciaries, as well as to investment advisers with discretionary authority over the purchase and sale of plan securities.

Underlying the standard, are prohibitions against business or investment transactions between the plan and fiduciaries or interested parties.

Upon violation of the prohibitions, the fiduciary may be held personally liable to the plan for any misuse, fraud, or mismanagement. Exemptions can be applied for when parties feel that actions are not to the detriment of the plan and its participants and should be allowed. Both the IRS and the Department of Labor are responsible for enforcing the fiduciary standards. The Department of Labor may file charges on behalf of the participants if the fiduciary has breached or violated the standards imposed by ERISA. The IRS may fine the employer and revoke the plan's favorable tax treatment. Both civil and criminal actions may arise from violations.

Group Technique | Employee Benefit Plans

In many types of insurance programs, such as group life insurance and group health insurance, the group technique enables these coverages to be written as employee benefit plans. Unlike individual insurance, group insurance is based on a view of the group as a unit, rather than on the individual. Usually, individual insurance eligibility requirements are not required for group insurance written under an employee benefit plan. The concepts that make the group technique work are all designed to prevent "adverse selection"—that is, to reduce the possibility that less-healthy individuals may join a group or be a larger percentage of a group than anticipated because of the availability of insurance or other benefits.

Characteristics of the group technique of providing employee benefits include some or all of the following:

1.  Only certain groups eligible. While most groups qualify, this requirement is intended to make sure that the obtaining of insurance is incidental to the group seeking coverage. Thus, a group should not be formed solely for the purpose of obtaining insurance.

2.  Steady flow of lives through the group. The theory behind this concept is that younger individuals should come into the group while older individuals leave the group, thus maintaining a fairly constant mortality or morbidity ratio in the group. If the group does not maintain this "flow through the group" and the average age of the group increases substantially, costs could increase dramatically.

3.  Minimum number of persons in a group. A minimum number of persons, typically 10, must be in a group to be eligible for group benefits. However, this requirement has been liberalized to the point where two or three individuals in a group may obtain coverage. This minimum number provision is designed to prevent less-healthy lives from being a major part of the group and to spread the expenses of the benefits plan over a larger number of individuals.

4.  A minimum portion of the group must participate. Typically in group life and health insurance plans if the plan is noncontributory (i.e., solely paid for by the employer), 100 percent of eligible employees must be covered. If the plan is contributory (both employer and employee share the cost), 75 percent of the employees must participate. The rationale for this provision is also to reduce adverse selection and spread the expense of administration.

5.  Eligibility requirements. Frequently, eligibility requirements are imposed under group plans for the purpose, once again, of preventing adverse selection. A waiting or eligibility period may be used for certain benefits. Also, if employees do not join when eligible and want to enroll at a later date, some form of medical information may be required.

6.  Maximum limits for any one person. In certain cases, maximum limits on the amount of life or health benefits may be imposed to prevent the possibility of excessive amounts of coverage for any particular unhealthy individual.

7.  Automatic determination of benefits. To prevent unhealthy lives in a group from obtaining an extremely large amount of a particular benefit or benefits, coverage is determined for all individuals in the group on an automatic basis. This basis may be determined by an employee's salary, service, or position, may be a flat amount for all employees, or may be a combination of these factors.

8.  A central and efficient administrative agency. To keep expenses to a minimum and to handle the mechanics of the benefit plan, a central and efficient administrative agency is necessary for the successful operation of an employee benefit plan. An employer is an almost ideal unit because it maintains the payroll and other employee information needed in meeting appropriate tax and record-keeping requirements.

Over the years many of the requirements just described have been liberalized as providers of employee benefits have gained experience in handling group employee benefits, and because of the competitive environment. Nevertheless, the basic group selection technique is important in understanding why employee benefits can work on a group basis and how any problems that exist might be corrected.