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.

Reasons For The Growth Of Employee Benefit Plans

Numerous reasons exist why employee benefit plans have evolved from a fringe benefit to a major component of financial security today. They arise from external forces as well as the desire of employers and employees to achieve certain goals and objectives.

Business Reasons

A multitude of business reasons explain why employee benefit plans were established and why they have expanded greatly. Employers want to attract and hold capable employees. Having employee benefit plans in place helps to serve this objective. Also, in many cases an employer's competition has certain benefit plans and, therefore, it is necessary to have equal or better plans to retain current employees. Moreover, employers hope that corporate efficiency, productivity, and improved employee morale will be fostered by good benefit plans. Concerns for employees' welfare and social objectives also encouraged employers to provide benefits.

Collective Bargaining

Labor unions, through the collective bargaining process, have had a major impact on the growth of employee benefit plans. The Labor Management Relations Act (LMRA), which is administered by the National Labor Relations Board (NLRB), requires good-faith collective bargaining over wages, hours, and other terms and conditions of employment. A notable event occurred in 1948 when the NLRB ruled that the meaning of the term wages includes a pension plan, and this position was upheld in the landmark case of Inland Steel Co. v. National Labor Relations Board in the same year. Shortly thereafter, in 1949, the good-faith bargaining requirements were held to include a group health and accident plan (W.W. Cross & Co. v. National Labor Relations Board). As a result of these two decisions, it was clearly established that the LMRA provisions applied to both retirement and welfare benefit plans, and their subsequent growth has been substantial.

The LMRA, or Taft-Hartley Act, as it is commonly known, has also played significant roles in the development of employee benefit plans. Along with the Internal Revenue Code (IRC), it established the distinction between retirement benefits and welfare benefits. Additionally, the statute sets forth the basic regulatory framework under which both of these major categories of benefits are to be jointly administered with the collective bargaining process. As such, it is the legislative basis on which jointly trusteed benefit plans are founded.

Favorable Tax Legislation

Over the years the tax laws have favored employee benefit plans. Such preferential tax legislation has greatly encouraged the development of employee benefit plans as well as helped to shape their design, because many plans seek to maximize the tax treatment or tax consequences of various employee benefit plans. The main tax benefits of employee benefit plans are as follows: (1) most contributions to employee benefit plans by employers are deductible as long as they are reasonable business expenses; (2) contributions from employers within certain limits on behalf of employees are generally not considered income to employees; and (3) on certain types of retirement and capital accumulation plans, assets set aside to fund such plans accumulate tax-free until distributed. Some additional tax benefits may be available when such distributions are made. All in all, favorable tax legislation has had great impact on the development and expansion of employee benefit plans.

Efficiency of the Employee Benefits Approach

The bringing together after the industrial revolution of employees and employers in cities and in business firms made it possible for the employee benefits concept to flourish by covering many employees under one contract. The simplicity and convenience of providing coverage to people through their place of employment made sense from many standpoints. Employee benefits providers and suppliers, such as insurance companies, banks and various types of health organizations all found the marketing of such benefits through the employer to be a cost-effective and administratively efficient channel of distribution.

Other Factors

Many other factors have contributed to the growth of employee benefit plans. One such factor was the imposition of limitations on the size of wage increases granted during World War II and the Korean War. While wages were frozen, employee benefits were not. As a result, compensation of employees could effectively be increased by provision of larger benefits. The result was a major expansion of employee benefits during these two periods.

Some have argued that various legislative action over the years has encouraged employee benefit plans not only through providing favorable tax treatment but also by the government's "moral suasion" that, if such benefit plans were not established voluntarily by employers and employees, additional governmental programs might result. 


Also, allowing employee benefits to be integrated with governmental benefits has enhanced the private employee benefit approach by taking into consideration benefits provided by governmental plans in benefit plan design.

Development of the group approach to certain employee benefits has helped expand the employee benefit mechanism. The techniques inherent in the group selection process made it possible for employers to provide benefits that previously could only be provided on an individual basis, with coverage often determined by medical selection.

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.