Compensation Study Set 5

Business

Quiz 12 :
The Benefit Determination Process

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Quiz 12 :
The Benefit Determination Process

Employee Benefits forms a part of total compensation paid to an employee during its period of service in any organization over and above the basic pay provided to the employees. The five reasons for growth in employee benefits are Wage and Price controls, Unions, Employer Impetus, Cost effectiveness of benefits, Government Impetus. Out of the stated reasons for the growth in employment benefits Cost effectiveness of benefits still holds true since most of the benefits given to the employees are not taxable. This helps the employee to save tax. More over the health benefits, insurance benefits offered to employees at corporate levels are much more cost effective and reasonable than compared to the ones taken at personal level. Out of the stated reasons for the growth in employment benefits Employer Impetus has caused reduction of such benefits since this acts as an additional cost to be borne by the organizations. Few benefits that employees expect from the organization fall as an unwanted costs for the employer which can otherwise be easily ignored. For instance many organizations provide mandatory paid leaves to its employees or provide paid vacation to its employees; this adds additional cost to the employer. Such additional costs can be considered as a major factor in decline in the size of benefit packages. Also few Government impetus like pension, gratuity are few employee benefits which reduces the cost to employees earlier but also blocks its fund which can otherwise be invested for higher returns. Such benefits only defer the tax of employees but do not remove the tax burden.

The case revolves around the making of C made products whose sale has been slashed down aggressively due to global recession. Due to the market slowdown, there has been 12% decline in global profits. 1) On the basis of the exhibits 1 and 4, cost out the packages. It is shown below: Calculate the cost implications of the new plan - Option 1 on the cost structure. The calculation is shown below in the Excel spreadsheet. img The output of the excel spreadsheet is shown below: img The calculation for savings from reduction of one paid holiday is explained below: Cost for paid rest periods etc. for a time period of 9 days is $973 Cost for paid rest periods etc. for time period of 50 min is $864.89 So, savings would be $108.11. Also, eliminating the 10 minute paid break would not affect the cost structure since employees leave 10 minutes early. The total cost savings under option 1 would be $1,201. Calculate the cost implications of the new plan - Option 2 on the cost structure. The calculation is shown below in the Excel spreadsheet. img The output of the excel spreadsheet is shown below: img The total cost savings under option 1 would be $543. 2) On the basis of option 1 and option 2, one would recommend Mr. J the first option as there is more savings than option 1. There is a savings of $658 more in option 1. Since Mr. J wanted the total compensation package costs to be decreased by 3%, option 1 would fulfill this objective (total compensation per employee $3,692×0.03 = $1,071.) 3) Option 2 will definitely require less employee input than option 1. While option 1 offers over twice the cost savings, compared to option 2, to World Measurement, the employees will have to pay more out of their own pockets, i.e. salary, for the changes in this option. Employees will definitely notice the copays for the pension program, hospital, surgical, medical, and major medical premium, and dental insurance premium (5725) and the elimination of one paid holiday per year. However, they are less likely to be directly affected by the elimination of a 10-minute break (since they get to leave work 10 minutes earlier) and the coordination of social security with their pension plan. In reviewing the proposed changes included in option 2, the employees' pocketbook would be definitely less affected. Although improved claims processing for unemployment, workers' compensation, and long-term disability saves the company $33.26. This amount does not impact an employee's salary. While the current probationary period and the number of employees with less than one year of service is unknown, it will be assumed the majority of current employees will not be affected by these changes. Thus, the impact of these changes on their salary would be minimal. The major impact on an employee's salary would be the deductible for life insurance and dental insurance and the copay for hospital, surgical, medical, and major medical premiums. Overall, the costs associated with option 2, compared to the costs associated with option 1, would be less for the employees.

E is a VP of HR department at a chemical factory, Lawson Chemicals who has just compared its benefits program with the industry standards. It was found that the average industry standard is 31 percent where as they have a benefits program of 38 percent of payroll. E was demanded genuine reasons for this difference. The core activity area of the firm is into chemicals. This means that employees are more prone to health issues. The safety of the employees is at stake and this would make the employees keener to shift their jobs. E should provide details that major benefits provided to the employees is their health coverage, periodical health check up, family health insurance, subsidized charges in case of health issues faced by the employees. E can also provide them retirement benefits which are given only in case the employees continue their job for a specified period of time in the firm. This motivates the employees to continue working in the firm and be reluctant in switching their jobs. Moreover E can refer various laws introduced for the benefits of the employees like Fair labor Standards act states that social security shall be linked to the employees for the overtime hours worked by the employees in any firm. Employment Retirement Income Security act has provided certain rules if the employer opts to provide pension to its employees. Pension benefit Guarantee Corporation was set up to help the employers to provide its workers financial assistance in case the company goes bankrupt. Therefore for E to save its job it should take the use of various acts introduced in favor of employees and also convince the management that such benefits are necessary for the welfare of the employees considering the type of activity the company is involved into. Also E can prove to the management that such benefits fill not result in any additional financial pressure to the company and also make the employees feel that their welfare is the priority for the company.

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