UNDERSTANDING THE COST OF EMPLOYEE BENEFIT PACKAGES 2012 WCA CONFERENCE

Transcription

1 UNDERSTANDING THE COST OF EMPLOYEE BENEFIT PACKAGES 2012 WCA CONFERENCE

2 Calculating Total Compensation Absent from much of the discussion employees and the changes made under Act 10 is a how to properly assess rates of employee compensation. It is common when considering how much an employee is paid to reference annual gross income as the primary measurement the number that appears on the IRS W-2 form.

3 Calculating Total Compensation Cont. Gross income is a misleading indicator of total compensation cost. How much an employee makes should be determined according to how much it costs the employer each year in total direct expenditures for the employee not only for wages, but all present and future benefits. If counties calculate compensation, normalizing for all present and future benefits, it becomes clear that the true compensation of public employees is significantly higher than is commonly reported, and this fact should be taken into account when determining the most effective and equitable way to prepare budgets.

4 Calculating Total Compensation Cont. Calculating total compensation is important as counties move forward in restructuring their employee compensation programs. Calculating total compensation is important is because rates of compensation, as opposed to base wages, are far more reliable indicators as to whether or not a workforce is relatively overpaid or underpaid compared to their counterparts. Wage studies are an important step for local government employers in determining whether current compensation levels are internally and externally competitive with public sector and private markets. A wage study is only one part of the picture. Once appropriate wage levels are determined, county governments must also assess whether their benefit levels are competitive with public and private sector counterparts.

5 The Hidden Cost Of Benefits An analysis of benefits as part of total compensation does not result in a complete assessment of benefit costs. Calculations of the benefit component of ignore the costs of benefit programs. These costs are additional costs incurred by the employer in implementing benefit programs and the costs associated with employee use of benefits such as paid leave. scheduling issues and departmental disruption resulting from paid leave;; replacement costs;; administrative costs.

6 What is Our Mission? Mission One: Understand the true cost of benefit programs by considering the direct and indirect cost of benefit programs.

7 Mission Cont. Mission Two: Understand the structure of your benefit plan and how the structure drives cost. How does the structure of the benefit drive behavior? Are the incentives, disincentives appropriately balanced? What changes to plan design can lower cost without dramatically affecting the value of the benefit to the employee?

8 Mission Cont. Mission Three: Understand how your benefits program stacks up against your competition (public AND private). Benchmarking your benefits against those of your competitors allows you to present your benefits package to your employees with a sense of confidence and understanding for what benefits will provide to them. Importance of the private sector comparison. Qualitative comparison Quantitative comparison Understanding what the taxpayer/citizen receives Difficulties of comparing benefit programs in the post-act 10 world. Existing baselines from collective bargaining agreements and handbooks may not be a reliable indicator of reasonable and necessary benefit levels.

9 Mission Cont. Mission Four: Determine whether the cost of the benefit corresponds to the value placed on the benefit by the employee. Is the cost of the benefit better spent on other forms of compensation? For example, would employees prefer a higher wage increase rather than a lower deductible? Are there alternative benefits that the employee would find more valuable?

10 Mission Cont. Mission Five: Communicate the value of the benefit package to the employee. You cannot achieve your goal unless the employee knows and appreciates the cost of his or her benefits package. Regularly communicate about what changes are being made to benefit packages and why.

11 What are Benefits? of value, other than payment, that are provided to the employee in return for their contribution to the organization, that is, for doing their job Benefits many times are an indirect rather than direct element of compensation, e.g. payment of health insurance premiums, paid time off, etc.

12 Why do employers offer benefits? Benefits are an important consideration in attracting and retaining quality employees. Surveys have shown that employee job satisfaction is tied to the level of benefits provided by the employer. Employees appreciate benefits but often do not understand the costs associated with them. Corresponding considerations are benefit costs and the ability to sustain benefit levels over time. The passage of Acts 10 and 32 demonstrate the importance of cost considerations in designing a benefit package.

13 Benefit Categories Paid leave Vacation Holiday Sick Personal Insurance Life Health (including dental and vision) Short-term disability Long-term disability

14 Retirement Benefit Categories, cont. Wisconsin Retirement System (conditioned upon qualifying) Legally required benefits Social Security and Medicare Social Security Medicare Federal unemployment insurance State unemployment insurance Workers' compensation

15 Competing Considerations In light of poor economic conditions, county governments and their employees face significant challenges: Counties face difficult choices in determining whether they can maintain benefit levels and continue to fulfill service mandates and provide relief for taxpayers who are similarly experiencing economic distress;; Employees are faced with their own financial uncertainty and desire to seek out employers who provide adequate benefit levels. County governments must effectively balance benefit choices that meet the business objectives employee retention and cost control with the needs of the employee population. This balance may be achieved by virtue of a thorough analysis of the costs of employee benefit programs, public and private benefit comparisons, program selection and communication of benefit costs to employee groups.

16 A Process Based Approach to Employee Benefits Benefits must be viewed the context of the entire compensation package Assess each benefit individually to determine its cost and the ability your county to maintain the benefit in the short and long term. Recognize that an evaluation of the cost of benefit packages includes direct and indirect costs

17 Taxpayers (revenue) Service Provider Cost Mandated and other services: service recipients (citizens and taxpayers)

18 Where to start?

19 Where to Start Cont. Start with a blank slate: reject assumptions that benefit levels contained in collective bargaining agreements or handbooks were reasonable or necessary to attract and retain employees. Starting with a blank slate is not anti-employee: it simply provides a baseline for calculation of benefit costs and determination of appropriate benefit levels Previous benefit levels, especially those which were collectively bargained or mirrored the benefit levels in collective bargaining agreements (as often was the case in pre-act 10 handbooks) probably were not based upon an analysis of the direct and indirect costs of those benefits or any type of market analysis regarding the level of benefits paid to employees in the private sector.

20 Where to Start Cont. In the past, benefits were often substituted for increases in compensation under the belief (often mistaken) that the cost of the benefit was less than a wage increase. Once benefits were collectively bargained, they became part of the status quo and could not be changed absent a pro quo. Interest arbitrators often emphasized external comparables to evaluate the appropriateness of benefit levels with often little regard for local economic conditions or the long term impact of benefit levels on local governments.

21 Where to Start Cont. Understand that employers are not obligated to provide benefits other than those that are legally required. Employers have significant flexibility in designing their benefit programs. Vacation or paid leave must be paid out at termination or upon retirement;; Employees must be paid for holidays on which the courthouse is closed;; Employees must be paid time off which reflects the number of hours that they work in a work day, i.e., eight, ten, twelve, twentyfour.

22 Evaluate The Direct Cost Of Benefits A benefit analysis begins by assessing the direct cost of the benefit: how much does it cost in real dollars to provide the benefit? Direct benefit costs include things such as insurance premiums, retirement contributions and the cost of paid leave. Direct costs are relatively easy to calculate and factor into budgets. Time value of money considerations in calculating the direct cost of benefits (e.g., sick leave payout).

23 Evaluate the Indirect Or Hidden Benefit Costs Direct costs are not the only benefit costs. To understand the true cost of a benefit package, the or indirect cost of benefits must be considered. The hidden costs come in the form of administrative costs, benefit inefficiencies and increased costs resulting from benefit choices, i.e., behavior management.

24 Administrative Costs Benefit programs can be costly to implement. These costs come in the form of: Payment to outside vendors for administration;; Internal administrative costs (employees). Administrative costs must be considered in selecting benefit options. Internal administrative costs may be significant. Examples of benefits which utilize administrative resources include paid time off (particularly sick leave and sick leave payouts) and uniform allowances. Consider structuring benefits in a way that minimizes administrative costs.

25 Hidden Benefit Costs Paid Time Off Considerations money when they reduce paid time off for employees. The theory is that a county pays the same amount for a anything by eliminating days off from a benefit program. This theory ignores: productivity loss day's work for a day's scheduling issues and departmental disruption resulting from paid leave;; replacement costs including corresponding overtime;; appropriateness of staffing levels.

26 Paid Leave Benefits: Driving Behavior and Cost How does the ability to carry over and accumulate paid leave drive behavior? Employees are more likely to use leave if they cannot carry it over, accumulate it or get it paid out (i.e., use or lose it). Is the goal to goal of paid leave to allow the employee to enjoy time off work or to create a deferred compensation benefit? Why allow payout of paid leave in all cases of termination? Is the county better served by putting the money into salaries/wages than in leave banks that can be paid out? Does the county account for the liability of cash payouts?

27 Calculate the Cost of Paid Leave Counties have the data available to calculate the cost of paid time off in various terms including the daily and annual cost. Estimates should be made of the cost of replacing employees who utilize their paid time off. This cost should be added to the base cost in calculating the overall cost of paid leave. Analyze the impact to productivity and departmental operations as a result of paid time off. enough enough Are your paid time off policies designed efficiently or do they result in the need for additional staff to meet service demands? Recognize the employee interest in having paid time off as a benefit and the benefit that may result from having a more content and wellrested workforce.

28 The indirect costs of paid time off are evident particularly in 24/7 operations such as departments. An analysis conducted by one county demonstrated that it could achieve savings equal to or better than negotiating employee share of WRS contributions in part through the elimination of paid time off. Law enforcement operations incur substantial costs in filling shifts for those who exercise their paid time off days.

29 Health Insurance Considerations The direct costs of health insurance include premium contributions and any contributions to health reimbursement or savings accounts. The direct cost of health insurance has increased significantly over the past several due to the rising cost of health care.

30 Health Insurance Considerations Cont. Some local government employers have not been proactive in shifting the responsibility for these increased costs to employees through increased employee premium contributions. As a result, employers incur a disproportionate share the cost of health insurance cost increases. Fixed contribution levels Variable contribution levels (percentage)

31 Plan Design versus Premium The cost of a health plan, like all insurance plans, is based upon risk. The higher the risk that the insurer will have pay for covered services, the higher the premium cost of the insurance plan because the insurance premiums have to pay for the covered services or the insurer loses money. The plans with the highest cost are the plans where the insurer pays the first dollar when a covered event occurs (i.e., zero deductible plans). The plans with the lowest cost are plans where the insurer does not have to pay for covered services until a high threshold dollar amount is reached (i.e., high deductible policies).

32 Plan Design and Behavior In a zero or low deductible policy, the insured has no appreciation of the cost of receiving covered services because he or she has no out of pocket cost. Behavioral result: Insured is more likely to seek medical attention for marginal medical issues when it is not necessary because it cost them anything. Impact on cost of plan: More likely that there are users of covered services which drives up future costs of providing the same level of health care plan benefits.

33 Plan Design and Behavior Cont. In a policy that includes a deductible, the insured pays the entire cost of the covered service up to a certain dollar amount. Behavioral impact: The employee may consider out of pocket cost for receiving covered medical services and decide not incur cost unless medically necessary. Impact on cost of plan: Lower use of covered services and less money paid towards services means less risk to the insurer. This lower risk results in lower plan costs and lower yearly increases.

34 Allowing Retirees to Remain on Health Insurance Plan Common benefit offered to employees is to allow them to stay on county health plan if they pay the entire premium. Many allow the conversion of sick leave at retirement to help pay the cost of the premium. Allowing retirees to stay on health plan will drive up the cost of the plan because they are more likely to use covered services. How does this fringe benefit further the goals of the county? Are there alternative benefits for retirees that would be less costly? (Allow conversion of sick leave to be used towards premiums of other non-county health plans?)

35 Private Sector Comparison: Qualitative Differences In Plans Original compensation theory: employees forego better wages and salaries available in the private sector for better benefits available in the public sector. According to many commentators, this theory no longer holds true: the wages and salaries of public sector employees are catching up to or have caught up to their private sector counterparts. If compensation levels have equalized, should the benefits of public sector employees more accurately mirror those available in the private sector.

36 Equivalence? A comparison of public sector benefit levels with private sector benefit levels is not necessarily an accurate one. Pension programs are often significantly different in terms of contribution and return. Defined benefit pension plan versus 401 K plans Matching levels Paid leave bank payouts: long term liabilities associated with sick leave banks Termination or retirement payouts Ability to remain on health insurance plans post-retirement

37 American Enterprise Institute Study find that state and local government employees receive salaries roughly equal to those paid to private sector Wisconsin employees with similar education and experience or working in jobs with similar skill requirements. However, even following Act 10, pension benefits for Wisconsin public employees are roughly 4.5 times more valuable than private sector levels while health benefits are about twice as generous as those paid by larger private sector Wisconsin employers. This difference results in a combined salary-benefits compensation premium of around 22 percent for state workers over private sector workers, with varying but often larger pay advantages for local government employees. American Enterprise Institute: Impact Of Act 10 on Public Sector Compensation In Wisconsin. (May 29, 2012).

38 Communicating the Value of Benefits If you asked an employee what the total value of their compensation package is, how close would the answer be to the real number? Could most employees name all of the benefit programs offered to them? Are employee benefits discuss individually with employees at any time other than orientation? If the goal of the benefit package is to attract and retain employees, how can that goal be achieved if employees do not know what those benefits are or the value of the package to them?

39 Communicating the Value of Benefits Cont. An effective benefits communication program consists of a number of components: Personalized and concise benefit statements detailing benefits and costs Employee group meetings Employee individual meetings Employees in different age groups or different life stages may be more interested in certain benefits than others. Benefit statements can highlight certain benefits that may interest the individual employee.