Part 4 Compensating Human Resources Chapter 12 Managing

Part 4: Compensating Human Resources Chapter 12: Managing Employee Benefits Prepared by Linda Eligh, University of Western Ontario Copyright © 2008 by Nelson, a division of Thomson Canada Limited. 12– 1

Learning Objectives After you have read this chapter, you should be able to: 1. Define a benefit and identify four strategic benefit considerations. 2. Distinguish between mandated and voluntary benefits. 3. Discuss the shift of retirement plans from defined-benefit to defined-contribution plans. 4. Explain the importance of managing the costs of health benefits and identify some methods of doing so. 5. Describe the growth of financial, family-oriented, and time-off benefits and their importance to many employees. 6. Summarize benefits communication and flexible benefits as considerations in benefits administration. Copyright © 2008 by Nelson, a division of Thomson Canada Limited. 2

Long-Term Issues for CEOs Copyright © 2008 by Nelson, a division of Thomson Canada Limited. Fig. 12 -1 3

Strategic Perspective on Benefits • Benefit Ø An indirect reward given to an employee or group of employees for organizational membership. • Strategic Perspectives on Benefits Ø Benefits absorb social costs for health care and retirement. Ø Benefits influence employee decisions about employers (e. g. , recruitment and retirement). Ø Benefits are increasingly seen as entitlements. Ø Benefit costs average over 40% of total payroll costs. Copyright © 2008 by Nelson, a division of Thomson Canada Limited. 4

Strategic Benefits Considerations Copyright © 2008 by Nelson, a division of Thomson Canada Limited. Fig. 12 -2 5

Benefit Design • Decisions Affecting Benefit Design: Ø How much total compensation should be provided? Ø What part of total compensation should benefits comprise? Ø What expense levels are acceptable for each benefit? Ø Which employees should get which benefits? Ø What are we getting in return for the benefit? Ø How will offering benefits affect turnover, recruiting, and retention of employees? Ø How flexible should the benefits package be? Copyright © 2008 by Nelson, a division of Thomson Canada Limited. 6

Common Measurements of Benefits Effectiveness Fig. 12 -3 v Benefits as a percentage of payroll (pattern over a multi -year period) v Benefits expenditures per full-time equivalent (FTE) employee v Benefits costs by employee group (full-time vs. part-time, union vs. non-union, office, management, professional, technical, etc. ) v Benefits administration costs (including staff time multiplied by the staff pay and benefits costs per hour) v Health-care benefits costs per participating employee Copyright © 2008 by Nelson, a division of Thomson Canada Limited. 7

Types of Benefits Copyright © 2008 by Nelson, a division of Thomson Canada Limited. Fig. 12 -4 8

Government Security Benefits • Canada/Quebec Pension Plan (CPP/QPP) Ø Canada’s major pension plans, providing regular payments to people in retirement who have contributed to either or both of these plans. v Disability v Survivor payments benefits v Children’s benefit • Old Age Security (OAS) Ø Provides a monthly retirement benefit based on age and the amount of time lived in Canada. Copyright © 2008 by Nelson, a division of Thomson Canada Limited. 9

Government Security Benefits (cont’d) • Employment Insurance (EI) Ø Provides temporary financial assistance for unemployed Canadians while they look for work or upgrade their skills. Eligibility is based on work record. v Basic Benefits v Compassionate Care Benefits – – Maternity Benefits Parental Benefits Sickness Benefits Supplemental Unemployment Benefits (SUB) Copyright © 2008 by Nelson, a division of Thomson Canada Limited. 10

Government Security Benefits (cont’d) • Worker’s Compensation Ø A mandatory, no-fault, work injury insurance system that provides benefits to persons injured on the job. Ø Managed by provincial Workers’ Compensation Boards (WCBs) and funded by employers. Ø Employer premiums based on industry rates and safety prevention measures taken. • Provincial Medicare Ø Canada’s publicly funded health-care system. Ø Provides essential and affordable health care services for all Canadians, regardless of income. Copyright © 2008 by Nelson, a division of Thomson Canada Limited. 11

Canada’s Aging Population Copyright © 2008 by Nelson, a division of Thomson Canada Limited. Fig. 12 -7 12

Retirement Benefits • Retirements Benefits and Age Discrimination Ø Forcing retirement because of age is a human rights issue covered by human rights legislation and in Quebec by labour standards legislation. Ø Elimination of mandatory retirement in Canada presents challenges to employers on what if any benefits post 65 workers should receive. Ø The age of retirement continues to decline in Canada v Early Retirement – providing workers voluntary opportunities to leave their jobs. v Retiree Benefits – benefits provided to employees after retirement. Increasing costs and underfunded liabilities are undermining benefits for retirees. Copyright © 2008 by Nelson, a division of Thomson Canada Limited. 13

Employer Sponsored Pension Plans • Pension Plans Ø Retirement program established and funded by the employer and employees. • Traditional Benefit Plans Ø Defined-benefit plans v Employees are promised a pension amount based on age and length of service. Ø Defined-contribution plans v Employer makes an annual payment to an employee’s pension account. v Benefit payout is determined by the financial performance of the previous contributions and can vary. Copyright © 2008 by Nelson, a division of Thomson Canada Limited. 14

Pension Plans (cont’d) • Group RRSPs Ø A collection of individual RRSPs administered by the employer on behalf of employees of a company Ø Flexible – employees have choice of who to invest funds and how much to contribute Ø Deductions at source help employees realize an immediate tax deduction Ø Some employers match contributions • Deferred Profit-Sharing Plans (DPSP) Ø Employees receive a share in the profits of the company that is paid out as a pension at retirement Copyright © 2008 by Nelson, a division of Thomson Canada Limited. 15

Pension Plans Non-Contributory Plans Pension Terms and Concepts Vesting Locked-In Portability Copyright © 2008 by Nelson, a division of Thomson Canada Limited. 16

Health Care Benefits • Employers provide a variety of health-care and medical benefits, usually through insurance coverage Ø Extended health care for employees and dependants v Prescription drugs v Vision care v Dental insurance Ø 90% of Canadians have some form of drug plan Ø Most employees pay a deductible or premium Ø Since mid-1990 s employer health-care benefits costs have increased significantly faster than inflation Copyright © 2008 by Nelson, a division of Thomson Canada Limited. 17

Increases In Health Benefits Costs Wellness programs not embraced More new drugs along with more consumer education Double digit inflation of drug plans Aging Population Shifting costs from public to private sector Change in the mix of services Copyright © 2008 by Nelson, a division of Thomson Canada Limited. Increased use of services New technology and services 18

Controlling Health-Care Benefits Costs • Changing Co-Payments, Employee Contributions and Limiting Coverage Ø Co-payments v strategy requiring employees to pay a portion of the cost of the benefit premiums Ø Splitting premiums with employees, implementing deductibles Ø Introducing limits on amount of benefits to be received (e. g. Maximum of $1000 major dental/year) Ø Limit coverage to employee, excluding family members Ø Reducing amount of reimbursement on certain benefits Copyright © 2008 by Nelson, a division of Thomson Canada Limited. 19

Controlling Health-Care Costs • Health Promotion Strategies Ø Targeting health promotion strategies towards medical conditions of employees likely to result in need for treatment. • Managed Care Ø Approaches that monitor and reduce medical costs through restrictions and market system alternatives. • Preferred Provider Organization (PPO) Ø A health-care provider that contracts with an employer group to provide health-care services to employees at a competitive rate. • Health Maintenance Organization (HMO) Ø A plan that provides services for a fixed period on a pre-paid basis. Copyright © 2008 by Nelson, a division of Thomson Canada Limited. 20

Managed Health Care and a Two-Tiered Health System Fig. 12 -8 Copyright © 2008 by Nelson, a division of Thomson Canada Limited. 21

Controlling Health-Care Costs (cont’d) • Health Spending Account (HSA) Ø Also known as defined-contribution health plans. Ø Employers contribute a set amount to employees to cover their own health-related expenses. Ø Works like a bank account. • Advantages Ø Improved employee morale. Employees have more control in making decisions that affect their own health. Ø More employee involvement results in better understanding of benefits costs. Ø Facilitates recruitment and retention of high-calibre employees. Ø Promotes overall positive view of the employer. Ø Lowers turnover. Copyright © 2008 by Nelson, a division of Thomson Canada Limited. 22

Financial Benefits Financial Services: Credit Unions, Purchase Discounts Financial Services: Savings or Stock Investment Plans Relocation Assistance Financial planning or counselling Financial Benefits Insurance Benefits Educational Assistance Copyright © 2008 by Nelson, a division of Thomson Canada Limited. 23

Family-Oriented Benefits Child-Care Assistance Eldercare Assistance Family-Care Benefits Measuring Effectiveness Copyright © 2008 by Nelson, a division of Thomson Canada Limited. 24

Time-Off Benefits • Holiday Pay Ø Eligibility • Vacation Pay Ø Eligibility and scheduling • Leaves of Absence Ø Ø Ø Ø Medical and Sick Leave Well Pay Military Leave Election Leave Jury-duty Leave Funeral Leave Bereavement Leave Copyright © 2008 by Nelson, a division of Thomson Canada Limited. • Paid Time-Off (PTO) Plans Ø Combine all sick leave, vacation time, and holidays into a total number of hours or days that employees can take off with pay. 25

Statutory Holidays in Canada Copyright © 2008 by Nelson, a division of Thomson Canada Limited. Fig. 12 -9 26

Miscellaneous Benefits • Social and Recreational Benefits Ø Sports, picnics, parties, sponsoring of teams and interest groups • Severance Pay Ø A security benefit voluntarily offered to employees who lose their jobs. Payments are determined by the employee’s level within the organization and years of employment. Outplacement services and continued health insurance may be offered in lieu of or in addition to cash severance payments. • Unique benefits offered Ø Pet insurance, transportation subsidies, self-defence training etc. Copyright © 2008 by Nelson, a division of Thomson Canada Limited. 27

Benefits Administration • Benefits Communication Ø Benefits Statements v Annual “personal statement of benefits” that translates the benefits into dollars to show their worth. Ø The Internet and Benefits Communication v Web-based HR information systems allows employees to change their benefit choices, track their benefit balances, and seek benefit information on-line. Copyright © 2008 by Nelson, a division of Thomson Canada Limited. 28

Typical Division of HR Responsibilities: Benefits Administration Fig. 12 -10 Copyright © 2008 by Nelson, a division of Thomson Canada Limited. 29

Flexible Benefits • Flexible Benefit Plan Ø A plan (flex or cafeteria plan) that allows employees to select the benefits they prefer from groups of benefits established by the employer. • Problems with Flexible Plans Ø Inappropriate benefits package choices Ø Adverse selection and use of specific benefits by higher-risk employees Ø Complexity leads to higher administrative time and involvement to track choices Copyright © 2008 by Nelson, a division of Thomson Canada Limited. 30