Krieger, Raymond B.

English

eGrove (Univ. of Mississippi)

University of MississippieGroveTouche Ross Publications Deloitte Collection1974Employee benefits: Beyond the fringe?Raymond B. KriegerFollow this and additional works at: https://egrove.olemiss.edu/dl_trPart of the Accounting Commons, and the Taxation CommonsThis Article is brought to you for free and open access by the Deloitte Collection at eGrove. It has been accepted for inclusion in Touche RossPublications by an authorized administrator of eGrove. For more information, please contact egrove@olemiss.edu.Recommended CitationTempo, Vol. 20, no. 1 (1974), p. 20-24EMPLOYEE BENEFITS: Beyond the Fringe? By RAYMOND B. KRIEGER Consulting Actuary, Touche Ross-Stennes An employee of a department store in the southwest was recently in an automobile accident that will put him out of commission for a year. The man had worked 20 years for this employer, and so the store decided to continue his pay on an unofficial basis and publicized this fact to its em-ployees for morale purposes. But another store in the same area felt that a better way to improve company morale was to take out a group long-term disability policy to pay a portion of any employee's salary during a long period of disablement. The existence of a third party (i.e. the insurance company) to handle such payments would give its employees more security, it fell, because disability payments would no longer depend sim-ply on the good wil l of the company. it is obvious which store has a more appealing benefit program. Today's retailers are concerned about recruiting and re-taining quality people. But how often do they consider the importance of a good employee benefit program? Retailers would be well advised to review their present benefit pro-grams to see if they are solving their problems and if they are not, whether their benefit programs should be revised or replaced by new ones. In doing so, they should be aware of the wide range of existing benefits as well as what future employee benefits are being considered. The type of benefit program a store has should be in-fluenced by the unique characteristics of the average store's personnel: — Relatively high average age. — A proportion which is 70 percent female. — An average of 40 percent of the employees with less than five years of service. Continued 21 EMPLOYEE BENEFITS: Beyond the Fringe? — Relatively large portion of part-time as well as tempo-rary employees. — Salaries representing a high proportion of operational costs. Despite such exceptions as J. C. Penney (a leader in em-ployee compensation) and Sears (with its excellent profit-sharing plan), retailers generally do not offer fringe benefits that are competitive in the labor market. And benefits are particularly important under present conditions when employees are faced with inflation, with the high cost of illness, and with tax laws which make it difficult to save money for retirement or other needs. Employee groups have therefore created great pressure for such benefits as pension and profit-sharing plans, group insured medical and group practice plans, group life in-surance, disability income protection, and dental and pre-scription drug programs. In addition stock options and deferred compensation agreements are often sought to provide additional tax shelters and to act as an incentive for executive and management employees. Most companies spend an average of 10 percent of pay-roll for such programs, but in retailing the average is sub-stantially less. Cynical retailers faced with a serious shrink-age (averaging one to six percent of sales) sometimes argue that shrinkage should be considered a fringe benefit. It is true that this figure, added to the average size of retailing benefits, would bring the industry's average benefit costs more into line with that of other industries. Indeed, it is argued by some that a good benefit program can be a sig-nificant step in solving this industry-wide problem. More significant, however, is the fact that while many benefit programs in retailing were adequate when they were set up, changes in the work force, in social attitudes, in tax laws, in Social Security legislation, and in corporate goals have resulted in these plans developing either gaps in cov-erage or overlapping protection. As a result they neither justify their cost, nor motivate employees. For example, there are many companies that have major medical programs providing an individual with lifetime maximum benefits of only $15,000. These companies ap-parently do not realize the disadvantage they would be at should another firm offer one of their key men, who has a large family and has had many large medical bills, a posi-tion at a similar salary but with major medical coverage providing for $1,000,000 per person lifetime maximum coverage. The cost of the $1,000,000 maximum is actually little more than the cost of the $15,000 maximum. For one Chi-cago retailer, in fact, such a superior medical plan provided the edge in attracting two key executives from other stores. What does a well-designed fringe benefit program achieve? It keeps employee morale high, which in turn re-duces turnover and helps to attract top-grade people. It also motivates employees to achieve a higher level of per-formance, which of course would produce higher com-pany profits. The opposite effects were achieved in the case of a medium-sized midwestern department store, where a 55-year-old employee, who had worked at the store for 30 years, had to move away for family reasons. He had been a loyal, faithful employee and was now an executive of the store, but because its pension plan did not provide benefits when an employee leaves before he is 65, the man's 30 years of faithful service brought him no pension benefits. This would not have happened if the benefit plan had provided for vested retirement benefits after, say, 15 years of service. The cost would have been reasonable, and the "return" in motivational value would have been well worth that cost. In the future, however, such vesting is no longer going to be optional. It is expected to be part of pension reform legislation that will probably be enacted by Con-gress sometime during 1974. The Social Responsibility It is almost axiomatic that when private business does not move to meet the expectations of its employees in a "social" area such as this, the government is going to take an interest in it. To anticipate the government's further in-volvement, therefore, retailers especially should take a fresh look at their entire employee benefit program. Their first step should be to define its goals. They should examine, for example, the current program and its effectiveness, as well as the expanded benefits the firm is considering, the type of employee it is trying to attract, and, of course, the cost of alternative programs. For example, young single employees tend to emphasize starting salaries. Young married employees with children often are concerned about medical and life insurance, and do not care about retirement benefits. Older employees obviously want retirement benefits. Ideally each program should be tailored to the individual retailer and his needs. At this point, therefore, it becomes important to select a qualified consultant, who can offer independent and expert advice. The consultant works closely with the retailer and assists him in determining which benefit is most effective and responsive to his needs and which insurance company or bank offers the best pos-22 sible combination of price and service. This is where the consultant's skill and independence is evidenced. Pension benefits call for additional expertise. They should be designed and evaluated by an experienced actu-ary. Present and future cost implications must be examined carefully. A qualified lawyer with pension experience should also be retained to develop, in conjunction with the actuarial consultant, any pension or profit-sharing plan. One of their objectives is to prevent mistakes from enter-ing the program at the beginning, since such errors cause problems and heartache later on. Pension plans, like all plans, must be kept up to date. A southern1 retailer had been on an active acquisition pro-gram for five years and had acquired a number of com-panies. But when he began to transfer employees between companies he ran into trouble. First, a large number of people had to spend too much time simply administering the variety of programs. Second, and more important, it became difficult to get a talented manager, for example, to move to a merged company that had an inferior employee benefit program. The simple solution, of course, was to coordinate the pension plans so that all companies had the same pension formula for future benefit accruals as well as vesting provisions that gave credit for service with allied companies. Employee transfers were henceforth much more acceptable. If stock options arc to be offered, one should seek the advice of an expert in management consulting work, con-cerning whether the options should be qualified, non-qualified, or both. The objective should be to insure maxi-mum tax shelter consistent with company goals. O n c e the plans are in effect the benefits must be com-municated to the employees. This is possibly the key to an effective program and is often completely neglected. Com-munication concerning the overall plan should be clearly stated, simple to understand, and frequent, about once a year. Two ways of doing this have already proven themselves. The first is to send an annual memo to employees, show-ing how much the company is contributing for employee fringe benefits—for the individual employee and/or for all employees, A second method consists in sending to em-ployees a more elaborate brochure that explains the sepa-rate benefits—in dollar figures—to which the employee or his family is entitled in the event of death, disability, re-tirement, etc. This type of communication is usually more effective but is also the most expensive. A department store chain on the west coast recently dis-covered what poor communication can do. Its pension plan, for a variety of reasons, became overfunded. As a result, the IRS would not permit further company contribu-tions until the funded surplus was eliminated. Contribu-tions by the employees, meanwhile, continued. The problem arose when the store did not have a pro-gram of communicating the benefit program to employees. From the "rumor mill," word got around that the company was no longer contributing to the pension plan (which was true) but also that the plan's benefits were being funded only by the employees' own contributions and that an em-ployee could receive a better benefit by putting his money in a bank (which was far from true). Not only were both participation in the plan and company morale low, but a top officer of the store withdrew his own contributions. What does the future hold for employee benefit pro-grams? In the short run, we can expect that current cover-ages will be better coordinated (i.e., plans wil l tend to eliminate gaps and overlapping) and that new coverages such as dental insurance will be added. The long run is more interesting, however. One probable development will be the so-called "cafeteria" or "buffet" approach. No overall approach can meet the needs of the individual employee in the same way as can a program in which the employee is able to choose his own mix of bene-fits. Older and younger employees clearly have different benefit needs, for example, as do married and single em-ployees, men and women, and employees with and with-out children. Also what suits an individual at one stage of his career and salary level will not suit him as he progresses. The needs and desires of employees for pensions, health insurance, cash salary or bonus, life insurance, and vaca-tions are different for each person. The individual tailoring approach brings with it, how-ever, a set of questions: — Should an employee be given complete freedom? Should he be permitted to choose a plan that includes, for example, no life insurance or health insurance, or no pension? — What information does the employee need to make an intelligent choice? — What happens if the information given as the basis for making a decision misleads the employee? — To what extent will favorable tax benefits be available to employers and employees? It is clear that a sophisticated computer technology will be needed to make a program like this feasible. Reportedly, 10 large companies are currently consider-ing th is approach. To date, however, no company is known to be adopting such a program. Nevertheless, this is one of 23 EMPLOYEE BENEFITS: Beyond the Fringe? the most exciting prospects to be talked about in the field of employee benefits. But for the more immediate future, we should anticipate: — There will be an increasing number of employees pay-ing at group or "wholesale" rates for various types of financial protection which would be made available by employers, such as, for example, homeowner's insur-ance and automobile insurance coverage. — Vacations will be longer and there will be more flexibility on when they can be taken. — Employees will be given an increasing amount of time off for community activity and personal reasons. — The employer will take over more and more of the costs of fringe benefits. — Dental coverage will become a universal coverage. — Yearly physicals at company expense will become more prevalent for all employees, not only for those in top executive echelons: — Pensions will continue to increase relative to final pay, offering a higher standard of living after retirement. That store in the southwest which offered its employees a group long-term disability program, instead of continu-ing salaries on a voluntary basis, has continued to be extremely successful in its recruiting activities. One way it has remained a few steps ahead of its competitors has been by implementing some of the benefits just listed. While other retailers, in response to today's cost problems, have been cutting back, or at least not adding to current bene-fits, this store has made its investment in employee benefits pay off handsomely. For some, the word "investment" may suggest a brand new way of looking at fringe benefits. For others, it is a major factor in attracting and retaining the staff that can keep them ahead of the competitor next door. o EMPLOYEE BENEFITS: A Sample Program for Retailers A PENSION PLAN Eligibility: All employees, after age 30 and one year of service. Normal Retirement Date (NRD): Age 65. Early Retirement; After age 55, with 10 years of service. Benefit at NRD: 35 percent of the highest average pay received over five consecutive years in the last 10 years of service, which includes 50 percent of the employee's primary Social Security benefit at his retirement date. Normal Form of Payout: Life annuity with a five-year guarantee. Death Benefit Before Retirement: If the employee dies after age 60 and with at least 10 years of serv-ice, a monthly benefit is paid to the surviving spouse equal to one half of what the employee would have received had he retired on the day be-fore his death. Vesting: 25 percent after five years of service, increas-ing to 50 percent and 100 percent after 10 and 15 years, respectively. LIFE, MEDICAL, DISABILITY COVERAGE Plan Benefit Group Life 1 1/2 times annual salary. Major 80 percent of all expenses over $200 for Medical an individual ($300 for a family) up to a maximum of $500,000 for an individual over his lifetime. Long-Term On a disability lasting over six months, Disability the program would pay 50 percent of monthly pay, up to a monthly maximum of $1,500. The benefits are payable for life if disability continues. Note: 1) T h e 35 percent of f inal pay for the pens ion benefit is modest (the target is often 50 percent of pay, inc luding 50 per-cent of primary 5ociai Security), yet is related to pre-retirement pay and l iv ing standards. 2) T h e pens ion plan further provides for a modest post-retirement death benefit and a pre-retirement death benefit that protects relatively large accumulat ions in the event of death near retire-ment; these features involve a relatively modest cost. 3) A properly des igned medica l program can prov ide substantial protect ion for serious illnesses a n d yet not involve high costs. 24 What might a basic employee benefit program for re-tailers look like? Obviously, the program should meet the needs of the individual company. Here are some sample benefits designed to keep costs down for a company and yet provide reasonable and attractive benefits for existing and prospective employees. 

Employee benefits: Beyond the fringe?

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Employee benefits: Beyond the fringe?

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