Employee benefits, sometimes called fringe benefits, are indirect forms of compensation provided to employees as part of an employment relationship. To compete for quality employees in today's marketplace, employers must do more than offer a “fair day's pay.” Workers also want a good benefits package. In fact, employees have grown accustomed to generous benefits programs, and have come to expect them.
Employee benefits exist in companies worldwide, but the types and levels of benefits vary greatly from country to country. Generally speaking, companies in industrialized countries in Europe and North America offer employees the most generous benefit packages. Even within the industrialized world, however, employee benefits can vary significantly. For example, employees in Germany and other European countries receive more vacation days than the average U.S. employee. Conversely, most employers in the United States offer some form of medical/health insurance to employees. But most companies in European countries don't offer this employee benefit, because it is provided through government-sponsored socialized medicine programs.
Employee benefits were not a significant part of most employees' compensation packages until the mid-twentieth century. In the United States, for example, benefits comprised only about 3 percent of total payroll costs for companies in 1929. According to the U.S. Chamber of Commerce, however, employee benefits in the United States now comprise approximately 42 percent of total payroll costs. Several things account for the tremendous increase in the importance of employee benefits in the United States. In the 1930s, the Wagner Act significantly increased the ability of labor unions to organize workers and bargain for better wages, benefits, and working conditions. Labor unions from the 1930s to 1950s took advantage of the favorable legal climate and negotiated for new employee benefits that have since become common in both unionized and non-union companies. Federal and state legislation requires companies to offer certain benefits to employees. Finally, employers may find themselves at a disadvantage in the labor market if they do not offer competitive benefit packages.
LEGALLY REQUIRED BENEFITS
In the United States, legislation requires almost all employers to offer the social security benefit, unemployment insurance, and workers' compensation insurance. Larger companies (those with fifty or more employees) are also required to offer employees an unpaid family and medical leave benefit. Each of these legally required benefits is discussed briefly below.
Social Security. The Social Security Act of 1935, as amended, provides monthly benefits to retired workers who are at least sixty-two years of age, disabled workers, and their eligible spouses and dependents. Social Security is financed by contributions made by the employee and matched by the employer, computed as a percentage of the employee's earnings. Monthly benefits are based on a worker's earnings, which are adjusted to account for wage inflation. The Social Security Act also provides Medicare health insurance coverage for anyone who is entitled to retirement benefits. Medicare is funded by a tax paid by the employer and employee. The tax rate for Medicare is a combined 2.9 percent of the employee's total wage or salary income.
Unemployment Insurance. Unemployment compensation provides income to unemployed individuals who lose a job through no fault of their own. Eligible workers receive weekly stipends for twenty-six weeks. The specific amount of the stipend is determined by the wages the claimant was paid during the previous year. Unemployment compensation laws in most states disqualify workers from receiving benefits under the following conditions:
- Quitting one's job without good cause
- Being discharged for misconduct connected with work
- Refusing suitable work while unemployed
Workers' Compensation Insurance. Millions of workers are hurt or become sick for job-related reasons each year. All fifty states have workers compensation insurance laws that are designed to provide financial protection for such individuals. Specifically, these laws require the creation of a no-fault insurance system, paid for by employers. When workers suffer job-related injuries or illnesses, the insurance system provides compensation for medical expenses; lost wages from the time of injury until their return to the job (employees are given a percentage of their income, the size of which varies from state to state); and death (paid to family members), dismemberment, or permanent disability resulting from job-related injuries.
Nationwide, payouts for workers' compensation are relatively high and curbing costs is a priority for many U.S. companies. The increase in costs is primarily due to rising medical costs that now account for as much as 60 percent of total workers' compensation costs in some states. Fraudulent claims also increase costs.
Maternal and paternal leave are both popular topics in today's business world. Currently, federal law requires up to twelve weeks of unpaid leave for new parents, although legislation has been considered to raise the time limit. Globally, this is a very low amount of time, and many other nations, including Canada, offer a longer leave and pay their employees.
While some American employers use the national minimum, other companies recognize the global imbalance and offer their employees paid parental leave, or a contribution plan that will allow them to take more time off with their newborn child. Only California and Washington require paid leave for employees, but recent trends are encouraging more generous behavior in the private sector. One popular method companies are currently practicing is the inclusion of maternal benefits other than parental leave. This can include compensation plans for medical visits, extended health coverage for pregnant workers, or on-site facilities to make newborn and childcare easier for the employee.
OPTIONAL EMPLOYEE BENEFITS
Other employee benefits are quite common, but are not required by federal law in the United States. Some of the more significant optional benefits are summarized below.
Health Insurance. Basic health-care plans cover hospitalization, physician care, and surgery. Traditional fee-for-service health care coverage became increasingly expensive in the late twentieth century. As a result, many U.S. companies adopted “managed care” health care plans. In general, managed care plans cut health care costs for employers by requiring them to contract with health care providers to perform medical services for their employees at an agreed upon fee schedule, in exchange for the employer encouraging (sometimes requiring) the employees to receive their medical care within the approved network of health care providers.
Health Maintenance Organizations (HMOs) are one type of managed care plan. HMOs are organizations of physicians and other health care professionals who provide a wide range of services for a fixed fee. When participants need medical services, they pay a nominal per-visit charge of $5 or $10. Because members visit their health care facility more frequently, potential problems can be discovered and eliminated before they can become major health threats. Thus, HMOs can save money through preventative medicine. However, employees have a limited number of doctors from which to choose and must get approval from a primary care physician for specialized treatment.
Preferred Provider Organizations (PPOs) provide services at a discounted fee in return for the company's participation, which creates increased business for the health facility. Employees may choose the member facility of their choice. PPOs are somewhat less restrictive of patient choice than HMOs, since they allow employees
to receive health care outside the approved network if the employee is willing to shoulder a higher percentage of their health care expenses.
Point of Service (POS) plans are more flexible versions of PPO plans. In a point of service plan, there is a company-authorized network of medical centers and physicians that the employees can choose from, but the employee can also go outside the network for particular medical needs. Some sort of discount usually applies to the medical network the company offers, to encourage employees to stay within the plan, but the choice is theirs.
Employers are not legally required to offer health insurance to employees. If they do, however, the Consolidated Omnibus Budget Reconciliation Act (COBRA) provides for a continuation of health insurance coverage for a period of up to three years for employees who leave a company through no fault of their own. Such employees are required to pay the premiums themselves, but at the company's group rate.
CDHPs and FSAs. Due to rising health costs, many companies are choosing to repeal their health care benefits or offer alternative plans for their employees to find health insurance. In 2004 alone, the average cost of health premiums rose 7.5 percent, and companies continued to raise copayments and deductibles to follow the market. This has resulted in high costs all around for employees seeking competent health insurance, especially for those working in small to mid-sized companies. The smaller companies cannot handle the higher premiums very easily, so they must move the cost onto their employees. Larger companies are able to shoulder more of the cost, but they, too, are struggling under the rising costs.
In response to these issues, several alternative employee benefit plans have gained popularity. One of these options is the Consumer Directed Health Plan, or CDHP, which has gained more support in recent years. In CDHPs, employees work with companies to choose their own health coverage plan, tailored for them specifically. Companies offer CDHPs because analysis has shown employees often chose more streamlined, simpler plans that result in less cost for the companies. Many organizations also give employees the necessary resources to research health coverage so that they can choose the best components for themselves.
According to a 2008 study by Watson Wyatt and the National Business Group on Health (NBGH), more than half of United States companies are expected to offer some kind of CDHP by 2009, and the number is expected to increase even more. In 2006, a similar study found that only 33 percent of companies offered consumer-directed health plans. This increased to 39 percent in 2007, and then to 47 percent in 2008.
Nearly a third of American companies offering CDHP also offer a health savings account, or HSA. Deposits in an HSA account can be used by the employee in the event of a medical crisis, and provide yet another supplement to CDHPs.
Another form of the HSA is the flexible spending account (FSA), an option some companies are offering instead of—or in addition to—the CDHP. At the beginning of each year, employees are able to select specific health benefits and the amount they are willing to pay for the insurance. The cost is then deducted from their pretax salary, giving better benefits to both the company and the employee than they would receive.
Voluntary Leave. Voluntary leave includes all the leave companies offer employees for extraneous reasons (vacations, holidays, emergencies, etc). Paid sick leave is especially common for companies to establish and can be offered in a variety of ways. Employers can offer sick days based on how long an employee has been with a company and what position the employee has, or they can offer a flat number of sick days for all employees alike. Other companies use a paid-time-off plan that incorporates sick days, vacation days, and other types of voluntary leave into one cache of days that an employee can draw from when needed. Some states are considering making a certain amount of paid sick leave mandatory.
Long-Term Disability (LTD) Insurance. This benefit provides replacement income for an employee who cannot return to work for an extended period of time due to illness or injury. An LTD program may be temporary or permanent. The benefits paid to employees are customarily set between 50 and 67 percent of that person's income.
Pensions. Pensions, or retirement incomes, may be the largest single benefit most employees receive. In most instances, employees become eligible to participate in company pension plans when they reach 21 years of age and have completed one year of service. After they have satisfied certain age and time requirements, employees become vested, meaning that the pension benefits they have earned are theirs and cannot be revoked. If they leave their jobs after vesting, but before retirement, employees may receive these benefits immediately or may have to wait until retirement age to collect them, depending on the provisions of their specific pension plan.
Employers may choose from two types of pension plans—defined benefit plans or defined contribution plans. Defined benefit plans specify the amount of pension a worker will receive on retirement. Defined contribution plans specify the rate of employer and employee contributions, but not the ultimate pension benefit received by the employee. If a defined benefit plan is
chosen, an employer is committing itself to an unknown cost that can be affected by rates of return on investments, changes in regulations, and future pay levels. Consequently, most employers have adopted defined contribution plans.
Companies establish pension plans voluntarily, but once established, the Employee Retirement Income Security Act of 1974 (ERISA) requires that employers follow certain rules. ERISA ensures that employees will receive the pension benefits due them, even if the company goes bankrupt or merges with another firm. Employers must pay annual insurance premiums to a government agency in order to provide funds from which guaranteed pensions can be paid. Additionally, ERISA requires that employers inform workers what their pension-related benefits include.
Stock Options. A publicly traded company has the ability to offer its employees stock option benefits, if it chooses. If an employee takes part in a stock option plan, then part of their annual income will be invested in the company's own stock, usually at a lower than market price. This allows the company to gain extra investment from willing employees, if so needed, and also to bolster employee interest in the success of the company.
The company must come to an agreement on several factors before offering a stock option benefit plan to employees. First, the company must decide how many shares to set aside for stock option possibilities; this is usually somewhere between 5 percent and 20 percent of outstanding stocks. Many companies also choose to create a vesting time, a period that the employee must stay with the company before his shares become exercisable. This period differs for all companies.
Of course, companies should have full approval of the stockholders before installing an employee stock option plan. If they are too careless, the company can lose a controlling interest through overselling their stock. Along with shareholder approval, the corporate board should create applicable caveats for employee termination, options to exercise stock by employees, and refusal rights to limit the number of shareholders.
401(k) Plans. A 401(k) plan is a retirement plan offered by many companies. Essentially, it offers employees a possible contribution of their income into several different investment opportunities. Some companies offer a limited list of investment plans, while others work with the customer to form an investment plan including stocks the employee is interested in. A portion of the employee's income is then automatically contributed to that investment, with the employer acting as fiduciary. 401(k) plans are protected from creditors under national legislation and have an annual contribution limit of $15,000.
The money withdrawn for 401(k) plans is not taxed as an investment, but only as earned income. If an employee withdraws investment money before retirement, then a fee is taken, usually 10 percent, payable to the IRS. Some employees are allowed to take loans from their 401(k) plans. Such investment opportunities are becoming more commonly considered necessary for a successful retirement in the United States. It is a helpful benefit to offer employees who are not part of a public company, so that they can still participate in a company-contribution stock plan.
Life Insurance Plans. These employee benefits are very common. The premiums for basic life insurance plans are usually paid by the employer. Employee contributions, if required, are typically a set amount per $1,000 in coverage based on age. Employees are often given the opportunity to expand their coverage by purchasing additional insurance.
Two issues that are crucial to the management of employee benefits are flexible benefit plans and cost containment. Many employers now offer flexible benefit plans, also known as cafeteria plans. These plans allow employees to choose among various benefits and levels of coverage. Under a cafeteria plan, employees may choose to receive cash or purchase benefits from among the options provided under the plan. Flexible benefit plans present a number of advantages:
- Such plans enable employees to choose options that best fit their own needs. New workers, for example, may prefer cash; parents may prefer to invest their benefit dollars in employer-sponsored childcare programs; and older workers may decide to increase their pension and health care coverage.
- Deciding among the various options makes employees more aware of the cost of the benefits, giving them a real sense of the value of the benefits their employers provide.
- Flexible benefit plans can lower compensation costs because employers no longer have to pay for unwanted benefits.
- Employers and employees can save on taxes. Many of the premiums may be paid with pretax dollars, thus lowering the amount of taxes to be paid by both the employee and the employer.
Because of these advantages, flexible benefit plans have become quite popular: such plans are now being offered by many U.S. companies. However, some companies are shying away from cafeteria plans because they create such an administrative burden. Moreover, the use
of such plans can lead to increased insurance premiums because of adverse selection. Adverse selection means that people at high risk are more inclined than others to choose a particular insurance option. For instance, a dental plan option would be chosen primarily by employees with a history of dental problems. Consequently, insurance rates would increase because the number of low-risk individuals enrolled in the programs would be insufficient to offset the claims of high-risk individuals.
Companies can contain costs in several ways. Because an employer's workers' compensation premiums increase with each payout, firms can prevent unnecessary costs by scrutinizing the validity of each claim. Some employers cut costs by deleting or reducing some of the benefits they offer employees. This approach, however, can negatively affect both recruitment and retention. A more viable approach is to offer benefits that are less costly, but equally desirable. Companies can continue to offer attractive benefits by implementing some of the cost-containment strategies discussed next.
Many companies implement utilization review programs in order to cut health care costs by ensuring that each medical treatment is necessary before authorizing payment, and ensuring that the medical services have been rendered appropriately at a reasonable cost. These programs require hospital pre-admission certification, continued stay review, hospital discharge planning, and comprehensive medical case management for catastrophic injuries or illnesses.
Some employers have been able to increase the attractiveness of their benefit programs while holding costs constant, allowing an organization to get more of a “bang for its buck” from these programs.
CURRENT TRENDS IN EMPLOYEE BENEFITS
According to a 2008 article in the Insurance Journal, employee benefits are likely to remain balanced in the coming years, despite rising health care costs. Alternatives such as FSAs and other flexible plans are allowing employees to have more choice in health coverage and giving employers ways to save money. In addition to the new forms of coverage, employers are offering more subtle benefits at a lesser cost—benefits such as telecommuting options, stipends for gas, childcare options, and cross-training for skill development.
While some of the more traditional forms of employee benefits have declined in the past few years, other more innovative forms are on the rise. Personal use of company-sponsored cell phones is one of the growing benefit fields, as are fitness-center memberships and on-site vaccinations for employees. Companies are also becoming more family conscious, offering more long-distance calling for business trips, compressing work weeks, and providing legal assistance and other personal benefits.
SEE ALSO Employee Assistance Programs; Employment Law and Compliance
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"Employee Benefits." Encyclopedia of Management. . Encyclopedia.com. (March 18, 2019). https://www.encyclopedia.com/management/encyclopedias-almanacs-transcripts-and-maps/employee-benefits
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Employee benefits are compensations given to employees in addition to regular salaries or wages. These compensations are given at the entire or partial expense of the employer. Benefit packages usually make up between 30 and 40 percent of an employee's total compensation for employment, which makes them an important aspect of the terms of employment. While some employee benefits are required by law, many employers offer additional benefits in order to attract and retain quality workers and maintain morale. Some types of benefits are also used as incentives to encourage increased worker productivity.
LEGALLY REQUIRED BENEFITS
While some benefits are offered as incentives to attract workers, some are legally required. For example, employers must provide workers' compensation insurance, which pays the medical bills for job-related injuries and provides an income for employees who become disabled because of a job-related injury. Social Security must be paid by the employer (in addition to the amounts deducted from employees' pay) to help meet employees' retirement needs, and employers must pay for unemployment insurance to compensate workers in the event that their job is eliminated. The Family and Medical Leave Act, passed by Congress in 1993, requires large employers to provide workers with unpaid leave for family or medical emergencies (up to twelve weeks of unpaid, job-protected leave per year). Under this law, employees are guaranteed that they can return to the same or a comparable position and that their health care coverage will be continued during the leave.
TRADITIONAL TYPES OF EMPLOYEE BENEFITS
Because of continually rising health care costs, one of the most desirable types of benefits for employees to have is a health insurance plan. These plans can be set up to cover the individual worker and, in many cases, the worker's family as well; they may or may not include such options as dental, eye, chiropractic, hospital, and other types of health care. Health insurance plans may be provided at no cost to employees, or they may be made available at a more desirable rate than employees could get on their own. The health insurance aspect of a benefit package is often the major deciding factor in whether a person accepts a position with a company. The degree of health insurance is often more important to a potential employee than the salary level, especially when children are involved.
Most benefit plans also include a certain number of paid sick days, personal days, and/or vacation days. Many companies are finding ways of increasing the flexibility of employee benefits. One way to increase flexibility is to group vacation, personal, and sick days into a certain amount of paid time off (PTO). PTO allows employees to take days off—for example, to care for a sick child, observe a religious holiday, or go on vacation—without explanation. The PTO benefit helps employees because their time is more flexible, and it helps employers by maintaining morale and reducing unanticipated absenteeism.
Life insurance and retirement options are another type of benefit many companies offer their employees. These types of benefits often encourage employees to remain with the same company because they do not want to cash in their life insurance or retirement plans. This tends to make employees more loyal to the company because their future is invested with the company. It also gives the employee a feeling of power by having some control over planning for retirement.
EXPANDED TYPES OF EMPLOYEE BENEFITS
While health care, paid time off, and retirement plans are the most common types of benefits employees receive, some companies offer even more types of benefits to help attract and retain employees as well as increase employee morale and improve job performance. One example of this type of benefit is tuition reimbursement, which allows employees to further their education while working. Motivating employees to better themselves at the employer's expense, helps the company keep knowledgeable employees.
With the growing number of single parents and dual-career couples in the work force, many companies have opened day-care facilities in the workplace where employees can feel safe about leaving their children. On-site child care is obviously a very desirable benefit for parents because it allows them to check up on the children, cut down on travel time, and be available in case of an emergency. However, some childless workers feel that this benefit discriminates against them because they get no use out
of the day-care facility. One way many companies are handling this type of concern is through a cafeteria plan. While there are several different ways to set up a cafeteria plan, such as setting aside pre-tax dollars for medical expenses, one of the most useful ways is to give employees many different benefit options to choose from. Each employee is given a set allowance that can be used toward any benefit the employee chooses, allowing the employees to pick the options that will most benefit them. The cafeteria plan is one fair way to handle benefits for everyone concerned.
Another characteristic of the work force is its increasingly older age. As a result, there are an increasing number of workers with aging parents who need care. Many companies recognize the need for elder care and are providing benefits to help, such as referral services for quality nursing homes and flexible work hours and/or days off so employees can care for aging parents.
Other benefits provided by some employers include credit unions to help employees with financial needs, gym facilities to allow employees to fit exercise into their busy schedules, cafeterias that sell reduced price meals to working employees, and on-site laundry services where employees can have laundry done while they are at work. Making the work environment seem more like a family helps boost employee morale and improve working relationships. Many companies provide uniforms for their employees, so that workers do not have to worry about ruining their own clothing. The uniforms also help with the feeling of unity because everyone in the company is dressed similarly. Because transportation can often be a problem for employees, some companies are even providing transportation options as a benefit to employees. Disney World, in Orlando, Florida, has a shuttle that picks employees up from their living quarters and takes them to work. Corn detasslers meet in a central location and a bus takes them to the site. Sales people are often provided with a company car.
While these types of benefits are meant to attract and retain employees as well as create a positive work environment, some types of employee benefits are used to encourage increased performance. The following are the four main types of benefits used as incentives to encourage employees to exhibit superior performance:
- Profit sharing gives the employee a portion of the company profits. Profit sharing is often done through making shares of company stock part of the employee benefit package. Employees receive a certain number of shares of stock each year, which provides employees an incentive to help the company succeed. This might also be accomplished through a yearly profit-sharing bonus.
- Gain sharing rewards employees for exceeding a predetermined goal by sharing the extra profits. If profits exceed the goal, employees share in the extra profits.
- Lump-sum bonuses are a one-time cash payment based on performance. Lump-sum bonuses may be an annual reward, such as a Christmas bonus, where the purpose is to share profits with the employees, and thus motivate them.
- Pay for knowledge rewards employees for continuing their education and/or learning new job tasks. The more education or experience an employee has, the higher he/she moves up on the pay-for-knowledge pay scale. Pay for knowledge is an incentive for employees to continue their education because it results in immediate rewards on the job.
In addition to what are typically considered employee benefits, many employers also offer perks to their employees. Typically limited to employees in management positions, these perks include such benefits as country club or health club memberships, a company car, special parking privileges at work, tickets for sporting events, first-class travel accommodations, and generous expense accounts. However, certain types of perks are also being extended to employees in many different types of positions. One type of perk that is common in many retail stores is an employee discount on merchandise bought from the place of employment. For example, Dayton Hudson's Target stores offer a 10 percent discount to employees and their immediate families when purchasing merchandise from any Target store. Employees of local movie theaters often receive free movie tickets as a perk, while many restaurant employees receive free or reduced-price meals. By offering employees such perks, the company is providing a strong incentive for employees to continue working there.
FLEXIBLE WORK PLANS
A flexible work plan is another type of employee benefit that has been proven to have a positive influence on employee productivity, attendance, and morale. A flexible work plan allows employees to adjust their working conditions within constraints set by the company and may include such options as flex-time, a compressed work-week, job sharing, and home-based work. Flex-time involves adjusting an employee's daily time schedule; it can be as simple as allowing a worker to come into work an hour earlier and leave an hour earlier than the normal 8-to-5 workday. Usually there are some time constraints set up by the company, but employees who work within those constraints can basically set their own schedules. A compressed workweek involves working longer hours each day for fewer days than the normal Monday-through-Friday workweek. For example, at many businesses employees work ten-hour days, four days a week.
Job sharing allows two or more people to divide the tasks of one job. It allows the same consistency as a full-time person, because the work is simply divided among the people who share the job responsibility. Job sharing is popular among people who only want to work part time but want a job with full-time responsibilities. These types of people include older workers, retirees, students, and working parents. Home-based work programs allow employees to perform their jobs at home instead of in an office setting. These people are often known as telecommuters, because they commute to work through electronic mail, faxes, and other types of telecommunications. Home-based work is popular with disabled workers, elderly workers, parents with small children, and workers who have had to relocate far away from the workplace because of a spouse's job change. Through home-based work, all of these types of employees are able to take care of personal and family responsibilities while maintaining and enjoying their job and/or career.
It should be noted that the various types of benefits offered to employees can depend greatly on the size and type of the business as well as its geographic location. For example, a small business might be unable to afford to provide complete health care coverage for employees because there are not enough employees to divide the risk. This would cause the cost of the insurance to be high. On the other hand, a large company may not want to give all 1,000 employees a turkey for Thanksgiving because of the enormity of the undertaking. A video store would be more likely to give employees free movie rentals, while a restaurant would offer employees free or reduced-price meals. Employee benefits may be the major deciding factor for many people when choosing a company for employment. In order to attract and retain the best-quality employees, companies must be willing to offer flexible and extensive types of benefits to meet various employee needs.
see also Employee Compensation
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"Employee Benefits." Encyclopedia of Business and Finance, 2nd ed.. . Encyclopedia.com. (March 18, 2019). https://www.encyclopedia.com/finance/finance-and-accounting-magazines/employee-benefits
"Employee Benefits." Encyclopedia of Business and Finance, 2nd ed.. . Retrieved March 18, 2019 from Encyclopedia.com: https://www.encyclopedia.com/finance/finance-and-accounting-magazines/employee-benefits
Modern Language Association
The Chicago Manual of Style
American Psychological Association
The phrase "employee benefits" is an umbrella term that includes insurance programs, fully compensated absences (vacations, holidays, sick leave), pensions, stock ownership plans, and employer-provided services (such as child care) offered by employers to their employees. Employee benefits are also referred to as fringe benefits. Yet other benefits sometimes are treated by government as forms of income for tax purposes. These include bonuses, profit sharing, and the provision of a leased vehicle or housing. All "fringes" are by definition offered at the employer's option; thus employer contributions to Social Security, Medicaid, basic Medicare, Workers' Compensation, and other programs are not viewed as fringe benefits; they are required under law.
Certain categories of employee benefits may require that the employee pay a part of the cost of the benefit in order to receive the employer's contribution. For this reason, employees who have access to benefits outnumber employees who actually participate in the benefits offered. Young employees, for instance, may opt out of retirement programs. An employee may choose not to participate in a medical insurance program because he or she may already be covered by the spouse's participation in a family program elsewhere.
THE NATIONAL SURVEY
The U.S. Bureau of Labor Statistics (BLS) conducts an annual compensation survey as part of which it collects data on the major categories of employee benefits. Benefits tracked include paid leave, health insurance, retirement plans, life insurance, and disability benefits. The highlights of the BLS March 2005 survey follow:
- Paid Leave was the most common employee benefit offered; 77 percent of employees had both paid holidays and paid vacation time. Sixty-nine percent of workers had paid jury duty leave; 48 percent had paid military leave benefits.
- Health Care Benefits. Seventy percent of employees had access to medical care benefits, 46 percent had access to dental care, and 29 percent to vision care. Sixty-four percent had outpatient prescription drug coverage. Because most plans required employee participation, participation rates were much lower: 53 percent of employees participated in medical plans, 36 percent in dental plans, 22 percent in vision care plans, and 48 percent in drug coverage. Employee contributions averaged $273.03 for family plans and $68.96 for single employee coverage.
- Retirement Benefits. Sixty percent of employees had access to such benefits; 50 percent participated in such programs.
- Life Insurance. Of all private employees, 52 percent had access to such insurance; 49 percent participated.
- Disability Insurance. Forty percent of employees had access to short-term and 40 percent to long-term disability benefits. Nearly all employees participated in these programs.
TRENDS IN ACCESS
Trends in access to employee benefits in the six-year period 1999 to 2005 have been generally favorable from the employee's point of view showing either no change or a positive change. Thus access to retirement plans and medical care plans remained the same. The number of employees enjoying paid holidays, paid sick leave, and access to child care services and short-term disability programs increased. Child care access showed the strongest positive increase, from 6 percent of employees having access in 1999 to 14 percent in 2005—an 8 point increase. On the negative side, fewer employees had paid vacations—79 percent in 1999 and 77 percent in 2005. In 1999 67 percent of medical plans required an employee contribution; this number rose to 76 percent in 2005, a 9 point increase reflecting the continuing growth in healthcare—and hence in health-insurance—costs.
The BLS national survey provides breakdowns in its data by establishment size rather than company size, thus for establishments with 1 to 99 workers and those with 100 workers and more. Data on small businesses available from BLS are rather old; therefore this "small establishment" breakdown is the closest approximation to "small business" we now have available. Across the board, a smaller percentage of employees working for small establishments have access to benefits. Under medical programs, 59 percent of small establishment workers had access (versus 84 percent of large establishment workers); medical coverage was also the top-ranking programmatic benefit (ignoring time off) offered by small establishments. Data for other categories follow showing percent of workers having access in small establishments and, in parentheses, the percent in large establishments: Dental: 31 (65); Vision: 19 (41); Prescription Drugs: 52 (79); Retirement: 44 (78); Life Insurance: 37 (70); Short-Term Disability: 28 (55); and Long-Term Disability: 19 (44).
While small establishments offer fewer employees medical insurance, the costliest of the employee benefits, for single employee coverage small establishments paid nearly as high a proportion of such insurance as did large establishments. In 2005, small enterprises picked up 82 percent of the medical insurance premium; large enterprises 83 percent. Small establishments, however, required more participation from the employee opting for family coverage: they paid 66 percent of such premiums over against 74 percent paid by large establishments.
GOODS PRODUCERS AND SERVICES PROVIDERS
In every programmatic benefit category, goods producers offered more of their employees benefits than did establishments engaged in providing services. Among goods producers the leading category was short-term disability insurance, with 88 percent of employees offered such a benefit; medical coverage was a close second, with 85 percent of employees having access. In these two categories, service providers offered 36 percent of employees short-term disability coverage and 66 percent medical coverage. Data for the other categories follows in abbreviated format showing percent of workers in the goods producing sector having access and, in parentheses, the corresponding percentage for services producers: Dental: 56 (43); Vision: 36 (27); Prescription Drugs: 80 (59); Retirement: 71 (56); Life Insurance: 63 (48); and Long-Term Disability: 31 (30).
Goods producers also paid more of medical premiums than companies in the service sector: 84 percent for single coverage and 75 percent for family coverage. Corresponding values for service sector companies were 82 and 69 percent.
THE PROS AND CONS OF BENEFITS
A comprehensive benefits package can be an important and useful asset for a company in attracting and holding employees. A company with a reputation for excellent benefits—particularly a long history of offering and protecting such fringes—has competitive advantages and, indeed, can in part compensate for the cost of such benefits by paying somewhat lower salaries and wages.
Rich benefits packages, of course, also have a downside. They are costly. Cutting back on benefits in difficult economic environments can produce adverse effects on employee morale and productivity. In the U.S., where such benefits are available to a large percentage of the population and where the benefits (particularly medical care) are funded by the private sector, employee benefits can also reduce competitiveness over against employers overseas who either offer no benefits at all or where such benefits are paid from general taxes.
The two major forces at work affecting employee benefits are thus availability of labor on the one hand, which pushes up benefits in times of rapid growth, and the need to control costs, which causes benefits to be curtailed or their costs to be transferred to employees, on the other. Economic cycles, therefore—and international trade pressures—affect trends in benefits in a see-sawing fashion. Changes between 1999 and 2005, a period generally of economic downturn, illustrate this process: child-care programs were increasing, in part to attract a lower-paid female labor force; at the same time medical costs were being transferred to employees.
Small businesses tend to benefit from economically stressful times because cut-backs and layoffs increase the labor pool and small organizations with minimal benefit programs can compete more effectively for employees. In rapidly growing economies, large organizations improve their benefits programs to attract scare labor resources. These conditions suggest the optimum solution for the small business: it is to offer benefits sufficient to hold employees in good times but to keep benefits always affordable and modest enough to survive the downturns.
see also Employee Reward Systems; Flexible Spending Accounts; Sick Leave and Personal Days
"Easier Done than Said." Employee Benefit News. 1 December 2000.
EBRI Research Highlights: Retirement Benefits. Employee Benefit Research Institute. 2003.
Michael, Andy. "Playing a Pivotal Role." Employee Benefits. December 2000.
Simmons, John G. "Flexible Benefits for Small Employers." Journal of Accountancy. March 2001.
"Small Biz Balks." Crain's New York Business. 13 February 2006.
U.S. Department of Labor. Bureau of Labor Statistics. National Compensation Survey: Employee Benefits in Private Industry in the United States, March 2005. August 2005.
Hillstrom, Northern Lights
updated by Magee, ECDI
"Employee Benefits." Encyclopedia of Small Business. . Encyclopedia.com. (March 18, 2019). https://www.encyclopedia.com/entrepreneurs/encyclopedias-almanacs-transcripts-and-maps/employee-benefits
"Employee Benefits." Encyclopedia of Small Business. . Retrieved March 18, 2019 from Encyclopedia.com: https://www.encyclopedia.com/entrepreneurs/encyclopedias-almanacs-transcripts-and-maps/employee-benefits
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What It Means
Employee benefits, also known as fringe benefits, are the compensation an employee receives in addition to an hourly wage or annual salary. Common forms of fringe benefits include health insurance (a fund designated to help employees pay for medical expenses in the event they become ill or injured), paid vacations, and retirement pensions (annual payments made to former employees after they retire).
Although their overall value is generally secondary to an employee’s wages, fringe benefits do have a monetary value for employees. For example, businesses that offer health insurance benefits usually charge employees only a nominal amount to subscribe to the program. Employees who decline membership in their company’s health insurance program would generally pay a great deal more for individual health insurance. In this sense fringe benefits serve as an indirect means of offering employees greater financial gain.
Employers often offer additional fringe benefits, also known as perquisites, or perks, to attract highly qualified employees. Typical perks for upper-level or senior employees include expense accounts (an additional allowance of funds allotted for business-related travel, dining, and entertainment), use of a company car, and personalized stationery.
When Did It Begin
The modern practice of offering employee benefits began during the Great Depression (a period of economic hardship that lasted from 1929 until about 1939). In 1929 Justin Ford Kimball, a former school superintendent in Dallas, Texas, accepted a job as an administrator at Baylor Hospital. In a short time Kimball began to notice that a lot of the hospital’s unpaid bills belonged to teachers. Because he had been an educator, Kimball knew that teachers earned too little to pay the bills. To remedy the problem he created a fund that allowed teachers to pay a small portion of their salary (only 50 cents a month) toward mutual health coverage. As a result of Kimball’s efforts, teachers in Dallas became the first American employees to receive a group health insurance plan as part of their contract. First known as the Baylor Plan, Kimball’s group insurance later became known as the Blue Cross hospital insurance plan.
The term fringe benefits originated during World War II. At this time, in the midst of continued economic difficulties, the government imposed strict limits on wage increases as a means of controlling the flow of financial resources. To retain employment levels in the face of these limitations, the National War Labor Board (an organization dedicated to negotiating disputes between business and labor interests) created a system of fringe benefits to help offset the losses suffered by workers receiving low pay. After the war offering fringe benefits became standard practice in most industries.
More Detailed Information
Employee benefits are generally regarded to be an important incentive when people are deciding whether to accept a particular job. Most companies offer their full-time employees (those employees who work at least a standard number of hours per week, usually 40 hours, though perhaps fewer hours at certain companies) some form of health insurance, generally at a reduced cost to the employee. In some instances labor unions obtain employee benefits for their members by negotiating collective bargaining agreements, or contracts, with employees. For the most part these bargaining agreements will pertain to such issues as health insurance; paid sick leave, also known as sick days (an employee will continue to be paid if he or she becomes ill); or the creation of day-care facilities for employees with young children. In other situations employers offer prospective employees fringe benefits on their own initiative.
The main advantage of offering fringe benefits is that it allows employers to attract the most qualified candidates for certain jobs, particularly if several companies are interested in hiring a specific individual. Unique, specialized benefits for highly skilled or senior employees generally fall under this category. These benefits can range from the general, such as stock options (agreements through which employees have the right to purchase stock, or shares, in the company’s ownership) and profit sharing (additional cash payments based on the company’s profitability), to highly personal, often unusual perks. For example, contracts between professional sports teams and athletes often include provisions for travel allowances, additional game tickets for family members, personal chefs, and masseuses. One of the most extensive fringe benefits package in the history of professional sports was created in December 2006, when the Boston Red Sox (a professional baseball team) signed a young pitcher from Japan named Daisuke Matsuzaka. In addition to a yearly salary of $8.67 million, the team also provided Daisuke with housing, a translator, a personal assistant, a physical therapist, a massage therapist, and between 80 and 90 flights to Japan over the course of the six-year deal.
Toward the end of the twentieth century, as the American labor force became more diversified, companies started devising innovative forms of fringe benefits tailored to meet the evolving needs of their employees. Examples include on-site day-care centers, which allow parents to return to work after having children, and tuition-reimbursement programs, as a way of encouraging employees to pursue higher education.
"Employee Benefits." Everyday Finance: Economics, Personal Money Management, and Entrepreneurship. . Encyclopedia.com. (March 18, 2019). https://www.encyclopedia.com/finance/encyclopedias-almanacs-transcripts-and-maps/employee-benefits
"Employee Benefits." Everyday Finance: Economics, Personal Money Management, and Entrepreneurship. . Retrieved March 18, 2019 from Encyclopedia.com: https://www.encyclopedia.com/finance/encyclopedias-almanacs-transcripts-and-maps/employee-benefits