SESSION 7 Employees Benefits Expatriate Compensation Employees Benefits

SESSION 7 - Employees Benefits Expatriate Compensation Employees Benefits p. 1

Reward System SESSION 7 - Employees Benefits Expatriate Compensation Job Analysis Benefits Job Description Managing Base Pay Jpb Evaluation Variable Pay Recruitment Selection & Hiring Training & Dev’mt Career planning Working conditions Long-term Incentives Recognition Awards Perf. evaluation HR Planning p. 2

Definition SESSION 7 - Employees Benefits Expatriate Compensation Employee benefits are that part of the total compensation package, other than pay for the time worked, provided to employees in whole or part by employer e. g. Life insurance Pension Workers’ compensation Working hours Vacation Holidays. . . p. 3

Changes in Benefit Costs over Time Ø From 1955 to 1975 SESSION 7 - Employees Benefits Expatriate Compensation – Benefit costs rose at a rate almost 4 times greater than employee wages or the consumer price index Ø From 1963 to 1987 – The rate of growth had slowed to 2 times greater than employee wages Ø From 1993 to 1999 – Cost of benefits has stabilized p. 4

The Benefits Picture Today SESSION 7 - Employees Benefits Expatriate Compensation Ø Most full-time employees in the Western World receive benefits. Ø Virtually all employers offer some health insurance coverage. Ø Benefits are a major expense (about one-third of wages and salaries) for employers. Could go up to two-third in some countries. p. 5

Benefit Costs Perspective SESSION 7 - Employees Benefits Expatriate Compensation Ø Even though the cost of benefits is rising more slowly, some serious issues at the horizon – Health care costs alone are raising more than 6 -8 times the rate of general inflation in the US and EU – Pension financed with companies stocks in deep trouble with the declining stock market – Growing rate of retirees p. 6

(US figures) SESSION 7 - Employees Benefits Expatriate Compensation Annual Health Care Cost Increases Source: Eric Parmenter, “Controlling Health-Care Costs, ” Compensation and Benefits Review, September/ October 2002, p. 44 Figure 13– 1 p. 7

Why the Growth in Employee Benefits ? SESSION 7 - Employees Benefits Expatriate Compensation Ø The Unions played a strong role after 2 nd World War – Some strong unions such as Metal or Steelworkers have set a number of benefits due to little freedom to raise wages during the War – Pension plans – Supplementary unemployment compensation – Extended vacation plans Ø The Employers – – – Many of the benefits in existence today were provided at employer initiative Longer working hours triggered health as well as motivation issues Management was genuinely concerned for their welfare Employer had a major play in the social environment Human capital (labor) was crucial for the main industries until the computer age (1980) p. 8

Why the Growth in Employee Benefits ? SESSION 7 - Employees Benefits Expatriate Compensation Ø Government in most countries has played an important role in the growth of employee benefits • Mandatory plans mostly found in western world: – Social Security Coverage – Workers’ Compensation – Unemployment Insurances p. 9

Cost Effectiveness of Benefits SESSION 7 - Employees Benefits Expatriate Compensation Ø Most employee benefits are not taxable – Provision of a benefit in lieu of pay increase avoids (or at least defer) taxes for both the employee and the employer – Due to governmental endless debts, more an more threats of taxing a number of benefits Ø Group based benefits – Can be obtained at lower rate – Easy qualification standards p. 10

Benefit Administration Issues SESSION 7 - Employees Benefits Expatriate Compensation Ø Four major administration issues in setting up a benefit package – Who should be protected? – How much choice should employees have among an array of benefits? – How should benefits be financed? – Are your benefits legally defensible? p. 11

SESSION 7 - Employees Benefits Expatriate Compensation Who should be protected? Ø What probationary periods should be used for various types of benefits? Ø Which dependents of active employees should be covered? Ø Should retirees (as well as spouses and perhaps other dependents) be covered? Ø Should survivors or deceased employees (and/or retirees) be covered? If so, for which benefits? Ø What coverage, if any, should be extended to disable employees? Ø What coverage, if any, during layoffs, leaves of absence, strikes, and so forth? Ø Should coverage be limited to full-time employees? p. 12

Choice Flexibility SESSION 7 - Employees Benefits Expatriate Compensation Ø Cafeteria style or flexible benefit plan – Employees permitted great flexibility in choosing the benefit options of greatest value to them – Even companies that are not considering a flexible benefit program are offering greater flexibility and choice, e. g. – Optional levels of group term life insurance – Availability of death or disability benefits under pension or profit-sharing plans – Choices of covering dependents under group medical expense coverage p. 13

SESSION 7 - Employees Benefits Expatriate Compensation Administering the Benefits Program p. 14

SESSION 7 - Employees Benefits Expatriate Compensation Flexible Benefits: How Does it Work? 1. Employer: Your Benefits package is worth £ 25’ 000 2. Employee: Some of it is fixed 25 k 14 K 3. Employer: The rest is flexible -how would you like it spent? 25 k 4. Employee: Like this 5. Employer: OK 25 k 11 k p. 15

Flexible Benefit Programs SESSION 7 - Employees Benefits Expatriate Compensation Ø Advantages – Employees choose package that best satisfy their unique needs – Flexible benefits help firms meet the changing needs of a changing work force – Increased involvement of employees and families improves understanding of benefits – Flexible plans make introduction of new benefits less costly – Cost containment: Organization sets spending ceiling; employee chooses within that constraint p. 16

Flexible Benefit Programs SESSION 7 - Employees Benefits Expatriate Compensation Ø Disadvantages – Employees make bad choice and find themselves not covered for predictable emergencies – Young employees might undervalue the need for a decent retirement plan and neglect contributions to such plan – Adverse selection: Employees pick only benefits they will use; the subsequent high-benefits utilization increases its cost p. 17

How should benefits be financed? SESSION 7 - Employees Benefits Expatriate Compensation Ø Alternatives include : – Non-contributory (employer pays total costs) – Contributory (costs are shared between employer and employee) – Employee financed (employee pays total costs for some benefits - by law the organization must bear the cost for certain benefits) Ø Usually benefit options are contributory – With the cost of benefits rising considerably, employers are increasingly turning to ways for cutting their costs p. 18

Are your benefits legally defensible? SESSION 7 - Employees Benefits Expatriate Compensation Ø Benefits have to comply with hundreds of complex sections of the tax code and other “devils”. Ø Because there are so many rules and regulations, benefits have to be administrated through a benefit administrator who is often a certified actuary p. 19

Attraction, Retention, & Motivation Ø Employee benefits are widely claimed to help in the retention of workers as benefits increase with years of service. SESSION 7 - Employees Benefits Expatriate Compensation Ø Equally, the amount of vacation time increases with years of service. Ø Decrease of employee satisfaction over the last 20 years especially regarding disability, life and health insurance. – Why: employers shifting costs to employees or reducing coverage to stabilize expenses Ø Increase perception of a company’s caring attitude – When: introducing day care, elder care, on-site fitness centers, weight loss program, health program (alcohol and drug treatment programs for employees), etc… p. 20

Cost Containment Ø Most prevalent practices include: SESSION 7 - Employees Benefits Expatriate Compensation • Probationary period – Excluding new employees from benefit coverage during probation period • Benefit limitations – Limit disability income payments to a maximum % of income and to limit medical/dental coverage to s certain fixed amount • Copay – Requiring that employees pay a fixed or percentage amount for coverage • Administrative cost containment – Controlling costs through policies such as seeking competitive bids for program delivery p. 21

SESSION 7 - Employees Benefits Expatriate Compensation Cost Containment Terminology p. 22

SESSION 7 - Employees Benefits Expatriate Compensation US Private-Sector Employer Compensation Costs, June 2003 Source: “Total Employer Costs Rose to 22. 61 in Second Quarter, ” BNA Bulletin to Management, September 11, 2003, p. 293 p. 23

Types of Employee Benefits Ø Pay for time not worked SESSION 7 - Employees Benefits Expatriate Compensation • Vacations, holidays, unemployment insurance, sick leave, parental leave, severance pay, Supplemental unemployment benefits (lay-offs) Ø Insurance benefits • Workers compensation, Hospitalization, health, and disability insurance, HMOs, PPOs, mental health, COBRA, life insurance, part-time worker benefits, pregnancy benefits Ø Retirement benefits • Social Security, Medicare, 401(k), Employee stock ownership plans, Ø Services • Credit unions, Employee assistance programs p. 24

SESSION 7 - Employees Benefits Expatriate Compensation Other Benefits Ø On-site or subsidized child care Ø Elder care Ø Fitness and medical facilities Ø Food services Ø Flexible work scheduling Ø Telecommuting Ø Educational subsidies Ø Sabbaticals Ø Loan programs for home office equipment Ø Concierge services Ø Trauma counseling p. 25

Pension Plan SESSION 7 - Employees Benefits Expatriate Compensation Ø What is a Pension Plan – An arrangement between an employer and employee for the payment of post- employment income, hereafter called pension benefits p. 26

Types of Pensions Plans Ø Defined Benefit Plans SESSION 7 - Employees Benefits Expatriate Compensation – Specifies the benefit workers will get at retirement – Employer contributes annually an amount into a trust fund – Guaranteed annuity or lump sum upon retirement Ø Defined Contribution Plans – Specifies the employer’s contribution – Cannot predetermine the employee’s actual pension benefit – Contributions are invested and projected benefits are offered p. 27

Types of Pensions Plans Ø Defined Benefit Plans SESSION 7 - Employees Benefits Expatriate Compensation • Employer provides a specific pension level defined in terms of – Fixed dollar amount or – Percentage-of-earnings amount that may vary with years of seniority • Employer finances this obligation by – Following an actuarially determined benefits formula and – Making current payments that will yield the future pension benefit for a retiring employee • Determination of benefit levels – Average earnings at end of tenure (last 3 -5 years) or – Average career earnings or – Fixed dollar amount not dependent on earnings benefits are offered p. 28

Types of Pensions Plans SESSION 7 - Employees Benefits Expatriate Compensation Ø Defined Contribution Plans • Benefit is defined as the future value of pension fund contributions made on an employee’s behalf • Exact value is unknown prior to retirement ; – depends on future earnings of fund investments • Benefits are solely a function of accumulated contributions; – therefore, the term defined contribution • Value of benefits is variable, dependent on contribution levels and earnings made on invested contributions – Example in the US: 401 (k) plan p. 29

Pension Alternatives SESSION 7 - Employees Benefits Expatriate Compensation Defined Benefit Plan Defined Contribution Plan 1. Provides an explicit benefit which is easily communicated Unknown benefit level is difficult to communicate 2. Company absorbs risk associated with changes in inflation and interest rates which affect costs Employees assume these risks 3. More favorable to long-service employees More favorable to short-term employees 4. Employer costs unknown Employer costs known up front p. 30

Pension: Demographic Evolution SESSION 7 - Employees Benefits Expatriate Compensation When Bismarck invented the state pension, with a retirement age of 65, average life expectancy was only 45. Now, in the OECD, life expectancy is 76 and rising-yet state pensions can still be claimed at 65 or even less. p. 31

Trends Affecting Retirement SESSION 7 - Employees Benefits Expatriate Compensation • The number of people age 65 and older tripled to about 34 million between 1940 and 1995. • According to U. S. census projections, people age 65 and older are expected to number 80 million by 2050. • In 1960, 45. 4 percent of male workers over age 65 were still in the labor force; in 1990, only 27. 4 percent were still working. While the labor force participation rates of women between ages 55 and 64 have been rising, further increases are not expected. • Eight baby boomers turn 50 every ten minutes. • The U. S. net national savings rate was relatively stable at about 7 percent of GDP from 1951 to 1980. It has collapsed since 1980, most recently dropping to less than 1 percent of GDP. Although to a lesser extent in Europe, the trend still affect EU countries. • In 1940, a 65 -year-old had a normal life expectancy of 12. 7 more years. Currently, it is about 17 more years. p. 32

Value of Employee Benefits Ø Expect benefits as part of their total compensation SESSION 7 - Employees Benefits Expatriate Compensation Ø Do not understand true value of benefits Ø Often undervalue their benefits Ø Often take benefits for granted Ø Often cannot list all benefits received Ø Have preferences regarding types of benefits they want p. 33

Creating a Relationship Organization Why would a talented person want to work and stay here? SESSION 7 - Employees Benefits Expatriate Compensation Great Company Great Job Great Manager Great Comp & Ben Your Employment Brand Sources: Mc. Kinsey: The War for Talent & Gallup: First Break All The Rules p. 34