ber81438_exr_001-068.qxd 8/11/09 7:38 PM Page 51 EXERCISE 10.3: D EVELOPING AN E MPLOYEE B ENEFITS P ROGRAM * Overview Chapter 10 provides an overview of types of employee benefits programs. The following exercise describes a new business start-up and some key decisions that need to be made if this organization is going to succeed with its planned \"preferred employer\" strategy. Learning Objectives After completing the exercise, you should be able to 1. Determine the critical issues that must be considered when designing an employee benefits program. 2. Identify the trade-offs that are made when choosing from a wide variety of benefits alternatives. 3. Decide how to judge the effectiveness of a benefits program. Procedure Part A: Individual Analysis After reading the chapter and before coming to class, read the scenario below and all exhibits and then answer the questions on Form 10.3.1. Part B: Group Analysis In groups, students should first review all their Forms 10.3.1 and then attempt to reach consensus on the questions. The group should prepare a concise, written response to each question on Form 10.3.1. Copyright 2009 The McGraw-Hill Companies. All rights reserved. Scenario USA Credit is a major financial services organization with growing interests in the private label credit card area. The organization began three years ago when it successfully acquired the credit card portfolios of five major U.S. retailers that were interested in outsourcing their programs. Since then, the organization has grown to a $1.5 billion business covering 25 retailers with a total of 6 million cardholders. Since its founding, USA Credit has targeted medium-sized retailers that like the customer closeness associated with having their own credit card but lack the technical expertise to effectively manage an accounts receivable business. USA Credit's business plan projects that it will double in size in the next two to three years. In addition, it plans to develop a bank card product and aggressively market it to small financial institutions that need this service to compete with the \"megabanks\" moving into their neighborhoods. Traditionally, the business has used one of two organization models in its credit card relationships, depending on the needs and the sophistication of the retail client. With *Contributed by Christine M. Hagan. its earliest acquisitions, USA Credit simply subcontracted the credit and collections function and staffed the storebased credit offices with its own personnel who processed customers' applications for credit, accepted payments, and assisted customers in the resolution of billing questions and problems. As the business grew, regional processing centers became the more efficient model, facilitated by sophisticated information systems. In recent acquisitions the on-site credit offices have been replaced with a bank of telephones tied directly to the regional processing center. In addition, there is a payment drop box for customer payments and an attractive kiosk containing applications and assorted credit-related information. Recent customer surveys indicate elimination of the traditional, staffed credit office has had no effect on customer satisfaction. In addition, retailers express a neutral attitude concerning whether or not there is a staffed, on-site office. Their major concerns focus on (1) increasing the number of credit card customers; (2) maintaining accurate billing information that is summarized in attractively designed monthly statements to customers; and (3) maximizing collection efforts. Since its founding, USA Credit's offices (both storebased and regional) have been staffed with part-time employees working 20-25 hours per week. Most employees are full-time students, mothers of school-age children, and senior citizens. Employees have been paid wages similar to those offered by other entry-level employers in the area, such as fast-food restaurants and retailers. No employee benefits have been offered, except those required by law. Several months ago, USA Credit's top management team decided its future goals would best be met by establishing a national service center to replace the regional and in-store credit offices. The firm's information technology is more than capable of supporting such a shift and executives believe that this would effectively position the company for the expected short-term growth, as well as a long-term plan to expand into Mexico and Canada. They wish to attract a full-time workforce in order to provide stability and a level of professionalism as new accounts are added and as strategic services are expanded. Estimates are that the center would initially employ 75 customer service associates and 4 to 7 other individuals, such as managers and technical specialists. If business grows according to plan, the number of customer service associates is expected to double over the next few years. A lengthy search has been conducted using a crossfunctional managerial team, which included Andy Wolfson, USA Credit's HR manager. After months of research, the team recommended locating the center on a two-acre lot just northeast of Las Vegas, Nevada. Real estate values are excellent in the region, the profile of the local worker is very appealing, the tax situation is favorable, and state and local political and community organizations welcome the 51 ber81438_exr_001-068.qxd 8/11/09 7:38 PM Page 52 Appendix B / Chapter Exercises opportunity to sponsor the opening of a solid, reputable, growing business such as USA Credit. Last week, the recommendation was unanimously approved for implementation. Groundbreaking is scheduled for next month. Andy Wolfson's main challenge is to assemble an HR plan. A key element of this involves designing a compensation and benefits program for the customer service associates. In addition to its state-of-the-art information systems technology, the competence and courtesy of its associates are expected to be major sources of competitive advantage. If USA Credit is going to continue to be successful in this upcoming growth period, it will be because it didn't lose focus on current customers and the customer service associates at the national service center would be 52 critical contributors to this effort. Andy has requested a variety of information from knowledgeable sources concerning the employee marketplace and the practices of other area businesses. Exhibit 10.3.1 is a copy of a memo concerning local conditions that sums up the vast majority of information that he has compiled from other sources. Based on this information, he has sent a preliminary proposal to the corporate vice president for administration. Exhibit 10.3.2 is a copy of the vice president's response. Working with a number of consultants and with local insurance companies, Andy has developed a list of possible benefit choices and their costs, which are itemized in Exhibit 10.3.3. ber81438_exr_001-068.qxd 8/11/09 7:38 PM Page 53 Exercise 10.3: Developing an Employee Benefits Program Exhibit 10.3.1 To: Andy Wolfson, HR Manager From: Andrea Birch, Senior Consultant Human Resources Concepts, Inc. As requested, I reviewed the information you provided concerning the Customer Service Associate positions planned for your Nevada Service Center. First, let me tell you that I think you'll be pleased with your decision to locate here. Gambling casinos/hotels are our foremost employers, accounting for 55 percent of the total jobs in the area. Second are tourist-related organizations such as small rental car companies, local motels, and restaurants. From the worker's point of view, these businesses are very cyclical and there is little job security. However, good casino workers are paid very well, both in base salary as well as tips. Needless to say, employee benefit programs are very meager. It is my belief that, if you position yourself as a solid financial services company with a pleasant, stable work atmosphere, you will have no difficulty finding skilled, reliable workers. In particular, you would represent an excellent opportunity for a \"casino spouse\" whose concern for stable employment and a comprehensive benefits packagewith particular emphasis on spouse and family optionsis an important factor in choosing and staying with a job. Even if one or more benefits were contributory, access to the coverage would be valuable to these workers. Thus, in a market that would normally call for hourly wages of $11.00 and up, we believe that your Customer Service Associate positions could be filled with competent employees in the $10.00 to $10.50 per hour range if the benefits plan were attractive. As requested, I am also pleased to provide you with some local information concerning paid time off in this area. Most organizations in this market provide two weeks of vacation after one year of service Copyright 2009 The McGraw-Hill Companies. All rights reserved. and increase this to three weeks after five years. Typically, firms located here offer 7 to 10 days'sick leave per year and 5 to 7 paid holidays. Be aware, however, that there is quite a bit of variance across organizations relating to these practices. I'll call you next week so that we can identify the next step in this process. 53 ber81438_exr_001-068.qxd 8/11/09 7:38 PM Page 54 Appendix B / Chapter Exercises Exhibit 10.3.2 To: Andy Wolfson, HR Manager From: Xavier Ortenzio, VP Corporate Administration I applaud your efforts to date in constructing a \"preferred employer\" HR strategy for our National Service Center. Having reviewed the copy of the Birch memo concerning the worker marketplace in Las Vegas, I heartily support your recommendations. Our original estimates called for a total compensation package for Customer Service Associates of $13.75 to $14.00 per hour. We arrived at this figure including a 28 percent rate for fringe benefits. \"Fringe benefits\" was broadly defined to include mandatory coverages, time off, and various other programs. Your recommendationthat this amount be redistributed by reducing the average hourly pay rate to $10.50 and by increasing the fringe benefit amount to 38 percent of base ratemakes sense. I also have no strong feelings about whether or not some benefits require employee contributionsprovided that this would not interfere with our \"preferred employer\" strategy. In addition, I read in yesterday's newspaper that cafeteria benefits are becoming increasingly popular. Would such an approach offer us any advantages? In any event, consider this your go-ahead to draft your benefits program as outlined above. I look forward to receiving your final recommendations and anticipate a speedy Executive Committee approval. The successful staffing and management of the National Service Center is critical to USA Credit's business strategy, future growth, and overall success. 54 ber81438_exr_001-068.qxd 8/11/09 7:38 PM Page 55 Exercise 10.3: Developing an Employee Benefits Program Exhibit 10.3.3 List of Possible Benefits Benefit Cost (Unless, where specified, all costs are annual rates) FICA Social Security Medicare FUTA (Federal Unemployment Tax) Workers' compensation State disability 6.2% on first $102,000 earned by individual 1.45% .8% on first $7,000 earned by individual $1.50 for every $100 of total payroll Not required in Nevada Employee Only Employee and Family $400 650 1,000 250 4.5% 3.0% .7% .5% 3.5% $62 per day $57 per day $52 per day $1,000 $550 Copyright 2009 The McGraw-Hill Companies. All rights reserved. Health care insurance program High plan $4,000 $6,000 Medium plan 3,500 4,850 Low plan 2,700 4,000 HMO 2,400 3,000 Dental plan Regular plan 650 1,300 HMO dental 480 900 Vision care 150 230 Prescription drug 350 625 Life insurance 1 year's salary 2 years' salary 3 years' salary Dependent life ($5,000 for spouse; $1,000 per child) Pension plan Defined benefit Defined contribution Tuition reimbursement Employee assistance program Child care subsidy Paid vacation Paid holidays Paid sick leave Long-term disability High plan (full salary after five consecutive days absent due to illness) Low plan (60 percent of salary after 10 consecutive days absent due to illness) 55 ber81438_exr_001-068.qxd 8/11/09 7:38 PM Page 57 Name Group FORM 10.3.1 You have been retained as a consultant to Andy Wolfson. Structure a benefits program that you think would be most effective for the customer service associates to be hired by USA Credit. Assume an average wage of $10.50 per hour and a workweek of 40 hours. A benefits budget of 38 percent of salary has been approved. If needed, assume that 70 percent of the customer service associates will require family coverage. 2. Copyright 2009 The McGraw-Hill Companies. All rights reserved. 1. What were the trade-offs you made in deciding on your recommendations? 3. Assume that Andy Wolfson is interested in a cafeteria benefits approach. He has heard, however, that when people are permitted to select their own coverages, unit costs may rise (called \"adverse selection\"). In other words, in cafeteria benefits, the averaging effect of users versus nonusers across employee populations declines as people opt out of programs that they are not likely to use in favor of benefits that they are very likely to use. How might Andy deal with this problem in designing a cafeteria benefits plan? 57 ber81438_exr_001-068.qxd 8/11/09 7:38 PM Page 58 FORM 10.3.1 (Continued) Name Group 4. What additional information concerning this situation would have enabled you to provide better recommendations? 5. How will you decide whether or not your benefits program is an effective one? Describe the procedure that you would use. What specific criteria would you use? 58