As HR director at World Measurement (see the class exercise on benefits we did), your bonus this year is based on your ability to cut employee benefit costs (without causing massive numbers of employe
Answer to the Benefits exercise- World Measurement
Cost out these packages given the data in Exhibits 1 and the information obtained from various insurance carriers and other information sources (Exhibit 4).
Exhibit 1: Current compensation costs
| Average yearly wage | $26,769 |
| Average hourly wage | $13.12 |
| Dollar value of yearly benefits, per employee | $8,923 |
| Total compensation (wages plus benefits) | $35,692 |
| Daily average number of hours paid | 8.0 |
| Benefits (by category) | Dollar cost/Employee/year |
| 1. Legally required payments (employer’s share only) | $2,141.00 |
| a. Old age, survivors, disability, and health insurance (FICA) taxes | $1,509.00 |
| b. Unemployment compensation | $292.00 |
| c. Workers’ compensation (including estimated cost of self-insured) | $311.00 |
| d. Railroad retirement tax, railroad unemployment and cash sickness insurance, state sickness benefits insurance, etc. | $29.00 |
| 2. Pension, insurance, and other agreed-upon payments (employer’s share only) | $3,124.00 |
| a. Pension plan premiums and pension payments not covered by insurance-type plan (net) | $1,460.00 |
| b. Life insurance premiums; death benefits; hospital, surgical, medical, and major medical insurance premiums; etc. (net) | $1,427.00 |
| c. Short-term disability | $83.00 |
| d. Salary continuation or long-term disability | $57.00 |
| e. Dental insurance premiums | $51.00 |
| f. Discounts on goods and services purchased from company by employees | $27.00 |
| g. Employee meals furnished by company | $0 |
| h. Miscellaneous payments (compensation payments in excess of legal requirements, separation or termination pay allowances, moving expenses, etc.) | $24.00 |
| 3. Paid rest periods, lunch periods, wash-up time, travel time, clothes-change time, get-ready time, etc. (60 minutes) | $727.00 |
| 4. Payments for time not worked | $2,769.00 |
| a. Paid vacations and payments in lieu of vacation (16 days average) | $1,558.00 |
| b. Payments for holidays not worked (9 days) | $973.00 |
| c. Paid sick leave (10 days maximum) | $172.00 |
| d. Payments for state or national guard duty; jury, witness, and voting pay allowances; payments for time lost due to death in family or other personal reasons, etc. | $66.00 |
| 5. Other items | $157.00 |
| a. Profit-sharing payments | $0 |
| b. Contributions to employee thrift plans | $71.00 |
| c. Christmas or other special bonuses, service awards, suggestion awards, etc. | $0 |
| d. Employee education expenditures (tuition refunds, etc.) | $40.00 |
| e. Special wage payments ordered by courts, payments to union stewards, etc. | $46.00 |
| TOTAL | $8,923.00 |
Exhibit 2: Benefit Preferences
| Benefit Type or Method of Administering | Importance to Workers | Benefit Type or Method of Administering | Importance to Workers |
| Pensions | 87 | Paid rest periods, lunch periods, etc. | 55 |
| Hospitalization | 86 | Dental insurance | 51 |
| Life insurance | 79 | Christmas bonus | 31 |
| Paid vacation | 82 | Profit sharing | 21 |
| Holidays | 82 | Education expenditures | 15 |
| Long-term disability | 72 | Contributions to thrift plans | 15 |
| Short-term disability | 69 | Discount on goods | 5 |
| Paid sick leave | 70 | Fair treatment in administration | 100 |
Refer to Exhibit 3: Two Possible Packages for Cutting Benefits Costs
Refer to Exhibit 4: Analysis of Cost Implications for Different Cost-Cutting Strategies: World Measurement
Cost Savings Calculation:
Under Option 1:
The following table shows the cost implications of the new plan - Option 1 on the cost structure.
| Benefit | Cost Savings |
| Dollar – on –dollar savings equal to copay amount |
|
| Pension | $ 300 |
| Hospital, surgical, medical, and major medical premiums | $ 350 |
| Dental Insurance premium | $ 75 |
| Elimination of Benefits |
|
| Savings from reduction of one paid holiday (refer benefit category 4 b) | $ 108.11 |
| Savings as Percent of Benefit- Type Cost |
|
| Life insurance premiums, death benefits, hospital, etc. ( = 10 % of $1,427) | $ 142.7 |
| Dental Insurance premium (= 15% of $51) | $ 7.65 |
| Coordinate social security with Lightning pension plan (=15% of $1,460) | $ 219 |
| Total cost savings under Option 1 | $ 1,202.46 |
Calculation for savings from reduction of one paid holiday:
Cost for paid rest periods etc. for a time period of 9 days is $973.
Cost for paid rest periods etc., for a time period of 50 min is $864.89
Savings is $108.11
Eliminating the 10-minute paid break does not affect the cost structure since employees leave 10 minutes early.
Total cost savings under Option 1 is $ 1,202.46Under Option 2:
The following table shows the cost implications of the new plan - Option 2 on the cost structure.
| Benefit | Cost Savings |
| Dollar – on –dollar savings equal to copay amount |
|
| Hospital, surgical, medical, and major medical premiums | $ 350 |
| Savings as Percent of Benefit- Type Cost |
|
| Unemployment compensation (=8% of $292) | $ 23.36 |
| Workers’ compensation (including estimated cost of self-insured) (=3% of $311) | $ 9.33 |
| Life insurance premiums, death benefits, hospital, etc. ( = 10 % of $1,427) | $ 142.7 |
| Salary continuation or long-term disability (=1% of $57) | $ 0.57 |
| Dental Insurance premium (= 15% of $51) | $ 7.65 |
| Discounts on goods and services purchased from company by employees (=10% of $27) | $ 2.7 |
| Employee meals furnished by company (=15% of $0) | $ 0 |
| Contributions to employee thrift plans (=10% of $71) | $ 7.1 |
|
|
|
| Total cost savings under Option 2 | $ 543 |
Which package should you recommend to Jacobs? Why?
Option 1 offers savings of $1,202.46 compared to savings of $543 for option 2. Based on the goal of a 3 percent wage increase and a compensation package costing 3 percent less option 1 fulfills this objective (total compensation per employee $35,692 x .03 = $1,071).
Which of the strategies do you think will require less input from employees in terms of their reactions?
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 ($725) 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.
For option 2, the major impact is the deductible for life insurance and dental insurance and the copay for medical premiums. Overall, the costs associated with option 2, compared to the costs associated with option 1, is less for employees.
