- Functional Categories of Employee Benefits
- The Employee Benefits Environment
- Employee Benefits under Adverse Economic Conditions
- Strategic Considerations in Designing Employee Benefit Programs
- The Integrated Systems Approach to Employee Benefits Planning
- The Cost Dimension
- Key Concepts in This Chapter
The Integrated Systems Approach to Employee Benefits Planning
The environment in which employee benefits operate is often erratic. For a number of strategic reasons, it is imperative to use a systematic process when designing, planning, and administrating workers’ benefits. One useful option is known as the integrated system approach, which has been in use for some time now. It is an organized process of classifying employee life events and extrapolating the employee’s needs from that classification. In this system, employees are put into categories of exposure to life event losses and their protection needs.
These needs can be organized into numerous categories, including the following:
- Healthcare (medical, dental, and so on)
- Losses resulting from employees’ (and their dependents’) deaths due to medical issues or from the risk of accidents
- Losses from disabilities, both short and long term
- Financial security needs from retirement
- Capital accumulation needs, both the short and long term
- Economic security needs from unemployment
- Health and financial protection from workplace injuries and accidents
- Long-term medical care, custodial care, and life care needs
- Dependent care assistance needs
- Plans that meet non-discrimination rules
- Needs for educational assistance for employees and their dependents
The objectives of this approach are the structuring of benefits to ensure that employee needs are met while mitigating loss exposures. This assists organizations in managing costs and also assists with employee communication.
It has been shown that this process helps to integrate employee benefits into a total compensation strategy, and from there, the integration of the compensation strategy into human resource (or human capital) plans for the organization at large. When designing a total compensation program, an employer will typically seek to integrate the program’s various elements—base compensation, incentive or variable compensation, and so on—with equity compensation and the various functional employee benefits into a cohesive strategy.
Some employers choose to set their total compensation and benefits levels equal to the competitive market average. Others set them at varying percentiles above said average. Which benchmark is chosen depends on the organization’s general strategy. For example, a company in need of a highly skilled workforce might set its benchmark above average, so as to attract and retain employees with the skills that they require, because they will be taken from a very competitive candidate pool. In contrast, other organizations might choose a position below average for fixed cash compensation and benefit levels, but target incentive compensation payouts above market. This risk-reward strategy would attract an entirely different sort of employee, with differing motivations, compared to the first example. Alternatively, companies may adopt an average or below-average benchmark with the thinking that savings accrued will outweigh the negative results of a higher turnover rates. The type of industry, and the characteristics of the employer, will determine the total compensation structure.
Within a context such as the one outlined here, a large and mature organization may take a more liberal stance on benefit programs and their relatively high fixed costs. However, a growing organization—particularly in the high-tech sector—might focus more on equity compensation and short-term variable pay in order to conserve resources.
Companies that are cyclical in nature may not want to increase their fixed costs with a liberal program, but instead will seek to cut programs and introduce higher levels of cost sharing with their workers. It is a continuous struggle to keep the right balance in allocating resources to meet employee needs on one hand and fiscal realities on the other.
Another approach entirely to benefits planning involves employers’ inclinations to reward longer service, rather than focusing on needs. This seniority-based system recognizes employee loyalty and commitment. Alternately, benefit eligibility may be tied to an employee’s salary or classification level, which results in a hierarchal system. Both of these differ greatly from the needs-based system, which simply recognizes that all employees (and their dependents) have needs that should be addressed; this is used to derive maximum productivity from the entire workforce.
Most organizations use a combination of these systems, called a dual-objective system. For example, healthcare benefits might be dictated by employee needs, while group life insurance and defined pensions are set based on income.
An example of the steps in the design of an integrated system is as follows:
Determine job groups to be covered under the plans:
- Active, full-time employees
- Dependents of active, full-time employees (Note that the legal requirement now, under the Affordable Care Act, has increased the age level of dependents covered by this category to 26.)
- Retirees and their dependents
- Disabled employees and their dependents
- Employees temporarily out of work due to layoffs, leaves of absence, military duty, labor disputes, and so on
- Part-time employees, furloughed employees, and so on
- Analyze the benefits currently in place. Look at the types of benefits, eligibility requirements and conditions, employee contribution requirements, flexibility provisions, and actual participation rates and experiences.
- Collect data on coverage that is legally required.
- Collect data on competitive coverage levels on all functional benefits.
- Develop the gaps and overlapping elements that exist in the current coverage levels in each category.
- Prepare an optimum benefits profile, taking into consideration the current gaps and employee needs. Also, in this step, it is important to consider the strategic objectives set for the benefits within the context of the total compensation strategy.
- Calculate the costs of the program using data sources, benefits consultants, benefits brokers, and insurance company representatives.
- Develop financing strategies—for example, self-insurance or indemnity plans. Also requiring consideration are cost-saving concepts, ideas, and programs.
- It is also important to consider the plan’s administrative requirements and needs within the context of third-party administrators, administrative services only (ASO) contracts, and the complete outsourcing or the use of internal administrators. A thorough analysis of the feasibility of outsourcing should be considered along with the ensuing cost savings.
- Develop alternative scenarios for the benefits profile, based on all the data collected in the previous steps. For each, develop relevant cost data. Include cost-savings strategies within each scenario. Consider cost savings and cost containment in each alternative.
- Present the report to executive management, stating the pros and cons of each chosen alternative. Also present to management the proposed alternative approach and a financing strategy for the recommended alternative.
- After securing approval from executive management, communicate the plan to employees.
- Set up open enrollment and implement administrative plans and processes.
- Set up a closed-loop measurement system with appropriate measurement metrics.
As shown by this example, an integrated systems approach is simply a method of analyzing each component of an employer’s total offering of employee benefits. This system analyzes the programs as a whole, in terms of its ability to meet workers’ needs, while managing associated risks and loss exposures within the organization’s overall goals.
This can prove very useful in overall benefit plan design, in evaluating cost-saving proposals, and in effectively communicating the employer’s program to employees. Thus, the integrated systems approach (essentially a planning approach) fits logically into a total compensation philosophy and avoids reactions to current fads, outside pressures, insurance, and sales pitches.