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This chapter is from the book

The Cost Dimension

The costs of providing an appropriate employee benefit program is of paramount concern. Benefit costs are on the rise. In a study conducted in 2012 by the Society of Human Resource Management (SHRM),4 it was stated:

  • Organizations spent an average of 19% of an employee’s salary on voluntary benefits (such as medical plans, dental plans, prescription coverage, flexible spending accounts, vision plans, survivor benefits), 18% on mandatory benefits (such as unemployment, worker’s compensation, Social Security), and 10% on pay-for-time-not-worked benefits (regular rate of pay for a nonworking period of time, such as vacations, holidays, personal bereavement and sick leave).5
  • This makes up a total of 47% of a given employee’s cash compensation. This is a significant number requiring careful analysis, planning, and control (in essence, the functional approach outlined previously). It further requires the necessary accounting and financial analytical skills. All stakeholders, using the language of business, should undertake conversations on this subject.

The SHRM study also stated, “More organizations indicated that the percentage of payroll reflecting the cost of voluntary benefits (20%) and mandatory benefits (15%) had increased.”6 The study further provided evidence that the slow pace of current economic recovery has negatively affected employee benefits planning in their organizations. This makes the case that the main custodians of employee benefit plans—the HR function—must approach this key area of business success with financial and analytical rigor.

Now, let us look at data from the Bureau of Labor’s statistics shown in Table 1.1.

Table 1.1 Relative Importance (%) of Employer Costs for Employee Compensation, December 2010 and 2012

Compensation Component

Civilian Workers

Private Industry

Government

2010

2012

2010

2012

2010

2012

Wages and Salaries

69.7

69.2

70.8

70.3

65.6

65.0

Benefits

30.3

30.8

29.2

29.7

34.4

35.0

Paid Leave

7.0

7.0

6.8

6.9

7.5

7.4

Supplemental Pay

2.3

2.4

2.7

2.8

0.8

0.8

Insurance

8.8

8.9

8.0

8.2

11.9

12.0

Health Benefits

8.4

8.5

7.5

7.7

11.6

11.6

Retirement and Savings

4.5

4.7

3.5

3.6

8.1

8.8

Defined Benefit

2.7

2.9

1.5

1.5

7.3

8.0

Defined Contribution

1.8

1.8

2.0

2.1

0.8

0.8

Legally Required

7.8

7.8

8.2

8.2

6.0

6.1

Source: Bureau of Labor Statistics, “Employer Costs for Employee Compensation–December 2010 and 2012,” p. 3.

This table indicates the following:

  • Employee benefit costs average around 30% of total costs. In other words, for every dollar spent compensating workers, 30 cents goes toward benefits. For medium to large companies, the absolute dollar amount can be substantial, requiring all accounting and financial disciplines to be brought to bear in order to manage them.
  • Public-sector percentages are higher than those in the private sector. A case can be made that public sector expenses for employee benefits should be brought in line with those in the private.
  • Defined contribution plan percentages for the public sector are almost a full percentage point higher than those in the private. As discussed later in this book, defined benefit retirement plans can be quite onerous from a financial perspective. These are commitments of funds (or liabilities) that must be paid out in future time periods. It has been proven difficult to set aside enough funds to pay obligations at future dates.

As you learned in this chapter, it has become imperative that financial and accounting rigor be brought into the management of employee benefit plans. When one adds the complex landscape of corporate scandals, major bankruptcies, and a volatile stock market, all resulting in billions of dollars in retirement plan losses, one can easily recognize that the employee benefits environment is more complex than ever, requiring more diligence in the management of these programs. It has never been more important for in-house benefits professionals and outside counsel, plan fiduciaries, sponsors, administrators, advisors, and insurers to avoid poor or inconsistent drafting, design, implementation, and administration of benefit plans.

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