Compensation part 3- Benefits

Nov 7, 2024
Fundamental Roles of Employee Benefits
1. Protection programs : provide family benefits, promote health, and guard
against income loss caused by catastrophic factors such as unemployment,
disability, and serious illnesses- Disability insurance, Retirement plans, Life
insurance, Medical insurance
2. Paid time-off policies: These policies compensate employees when they are not
performing their primary work duties under particular circumstances such as
vacation or illness.
3. Accommodation and enhancement benefits promote opportunities for
employees and their families. Employers may choose to offer one or more of
these benefits, including wellness programs, flexible work schedules, child care,
transportation services, educational assistance.
Design Considerations in Discretionary employee benefits

Consideration Description
Eligibility provisions- Whom to Companies must decide whether to limit participation to current
include? employees, their dependent family members, and survivors of
deceased current or retired employees.
For instance, exclude part-time employees as a cost-control measure.
Kinds of benefits – what kind of Companies may sponsor a variety of broad benefits, including
benefits to offer to eligible individuals? retirement plans, health care, and paid time off. Then they select
specific benefits from these broad categories.
For instance, defined contribution retirement plans are often
preferred because these plans are more cost-effective than defined
benefit plans.
Level of benefits- limit of benefit? Companies choose benefits based on maximum benefit limits.
For example, life insurance policies specify the benefit amount for the
death of an employee.
Consideration Description
Waiting periods Waiting periods specify the minimum number of months an employee must remain
employed before becoming eligible for one or more benefits.
Companies impose probationary periods to judge a newcomer’s job performance, and
they explicitly reserve the right to terminate employees with low job Performance
Financing benefits Employers choose from four approaches: noncontributory,
contributory, employee-financed programs, or some combination.
Noncontributory financing: the company pays the total costs for designated
discretionary benefits.
Contributory financing: the company and its employees share the costs.
Employee-financed benefits: employees bear the entire cost.
Employee choice Traditionally, a company provided the same benefits to most or all employees.
Increasingly, companies offer employees varying degrees of choice.
Flexible benefits plans enable employees to choose from among a set of benefits and
different levels of benefits eg: Childcare, tuition reimbursement, retiree health care etc.
Communication Oftentimes, employees either are unaware of or undervalue their benefits.
Communicating the features and costs of benefits creates an awareness of, and
appreciation for, the way current benefits improve the financial security and physical and
mental well-being of employees.
What will organizations get out of this?

An employer might choose to include benefits in its compensation package for

three primary reasons:
1. A cost advantage to the employer
2. Recruitment of certain types of workers
3. Tax incentives
1. Cost Advantage

• The first reason an employer may want to provide a benefit is that the employer
may be able to buy the product or service at a lower cost than employees would
pay if they tried to buy it on their own.
• Health insurance is a perfect example: Employers can generally purchase health
insurance for a substantially lower premium per enrollee than the amount
employees would have to pay for identical coverage if they bought the insurance
on their own.
• A particular insurance plan might cost 10000 per employee when purchased by
an employer that employs 500 workers, but the same insurance plan might cost
25000 if purchased by a single individual.
2. Recruiting Certain Types of Workers

• A second reason that employers may want to offer a compensation package that includes both
cash and benefits is to aid in recruiting and retaining certain types of employees, particularly
when the employer’s managers have a difficult time observing all relevant characteristics of
potential employees.
• Job applications would contain all relevant information about a potential worker, such as his or
her future productivity, work habits, career plans, commitment to the employer, and commitment
to undergoing future training.
• Unfortunately, many important characteristics are not observed, and managers may have a
difficult time eliciting such information.
• By offering a compensation plan that includes both cash and benefits that are more highly valued
by some applicants than by others, an employer may be able to get applicants to reveal some of
these characteristics themselves.

Example: Motivated to do an MBA 🡪 offer tution reimbursememt fees with a slightly reduced salary
3. Tax Incentives

Org gets incentives to offer the employee benefits-

• EPF: Contributions made towards the Employee Provident Fund (EPF) are
tax-deductible for the employer. The employer's contribution of up to 12% of the
employee's basic salary is exempt from tax under Section 80C of the Income Tax
Act.
• Group Health Insurance: The premium paid to insure your employees is
considered a business expense and can be deducted from taxable income under
the Indian Income Tax Act, of 1961. The Insurance Regulatory and Development
Authority Act, 1999, recognizes this tax benefit as an “employer entitlement”.
• Training and Skill Development: Companies can claim a full deduction on any
expenditure incurred on skill development projects approved by the Central
Board of Direct Taxes. Section 35CCD(1); Section 35CCD(2)
Benefits of group health insurance

Risk reduction
• Insurance costs tend to fall as the insured group—also known as the insurance
pool—gets larger.
• First, as the group gets larger, insurance becomes less risky to provide. As the
size of the insured group gets larger, it becomes much easier for the Insurance
company to predict the total medical expenses for the group according to the
characteristics of the group
Adverse selection
• A second motivation for employer-provided insurance is to avoid an inherent
problem in insurance markets that is referred to as adverse selection
• Good risks v/s bad risks

Economies of Scale
• Finally, administering an insurance policy involves a good deal of paperwork,
claims processing, and other administrative functions. Many of these functions
are not much more time-consuming and expensive to perform for a large group
than for a smaller group, a process referred to as economies of scale.
• Because of this, as the group gets larger, the fixed costs of these administrative
tasks can be shared among a larger number of people, thereby reducing the
average cost per insured person.
The Psychology of Employee Benefits

1. The employment relationship as social exchange

2. Psychological contracts
3. The relationship between having a benefits program and employee attitudes.
1. Employment Relationship as Social Exchange

• All social behavior can be seen as “an exchange of activity (work effort), tangible
(visible performance) or intangible (motivation and commitment), and more or
less rewarding or costly (pay and benefits), between at least two persons
(employee and employer).”
• Thus, social exchange in the employer-employee relationship is one in which the
employer offers inducements (e.g., wages, employee benefits) in return for
employee contributions (e.g., performance, commitment).
• Role of HR practices and expectations of reciprocity
Win-Win?

• For companies 🡪 employee benefits not only offer cost advantages and tax
incentives, but also act as a recruitment tool for attracting and retaining desired
employees.
• For Employees 🡪 Employee benefits provide employees with economic and
income security, and also with personal and family welfare. People choose to
work in exchange for remuneration.
• While wages or salary act as basic remuneration, employee benefits act as
remuneration for the welfare of employees and fulfill such needs as health care,
dependent care, retirement planning, vacations, and education.
• As such, in exchange, they elicit increased motivation and commitment from
employees toward the company and its goals.
Employee benefits as social exchange
• Social exchange tends to evolve over the employment period and is not
necessarily established at the time of employment
• As employees become aware of policies or use various employer practices over
the period of their employment, they reciprocate with increased or decreased job
effort and commitment.
• Employees’ needs change over the duration of their employment with a
company. This change may be in terms of personal career needs or self, family
health, and welfare needs
• Different employee benefits are likely to be relevant to employees at different
circumstances and stages of their lives and careers.
• If an employer can provide an employee with benefits suitable to an employee’s
evolving needs, the employee is likely to reciprocate with increased work effort
and commitment.
2. Psychological Contracts
• A psychological contract has been defined as an employee’s subjective
perceptions of the relationship of mutual obligations with the employer.
• Employee benefits 🡪 psychological contract that employees hold about the
employer’s obligations to them in exchange for their work efforts.
• Similarly, employers can expect employees to work and be committed to the
company in exchange for the benefits they provide.
• Psychological contracts implicitly establish terms of employment, which stands
in contrast to exchange agreements, such as wage and salary levels
As an example,
• Let’s say, company policies might imply that an employee will be eligible
for educational assistance after five years of continuous employment and
satisfactory levels of performance.
• An employee who is interested in making use of this benefit would
reciprocate by remaining with the company and working hard.
• The employee’s psychological contract with the company would include
the employee’s obligations (five years of hard work) + employer’s
obligations (educational assistance).
• Psychological contracts are not an either-or proposition.
• Expectations of the employer fall on a continuum, ranging from pay and
promotions to career development and family welfare.
Continuum of expectations encompassed between transactional psychological contracts and
relational psychological contracts.
Toward the
• 🡪 The Transactional end of the continuum- employees’ expectations of the
employer are more economic and extrinsic in nature,🡪 expectations of high pay
and promotions or career advancement in exchange for hard work represent
transactional types of expectations in the psychological contract.
• 🡪 The Relational end - employees’ expectations might focus on either economic
or noneconomic, and these expectations are emotional, subjective, and intrinsic
in nature. Employees’ expectations of job security in exchange for loyalty to the
employer represent relational types of expectations in the psychological contract.
Transactional Relational + Transactional
Short term relationship Employees hired by a company with the understanding of
Example: full-time employment are more likely to hold both
An independent contractor or transactional and relational expectations of their employer.
consultant hired by a firm.
Independent consultant’s Not only,
expectations 🡪good pay + the
opportunity to build his or her Pay
marketability by adding the firm to Promotion Work efforts
his or her client portfolio. Career advancement
Project ends, relationship ends
but also

Job security
Recognition Commitment
Support Loyalty
Development of Psychological contracts
• Takes shape in Pre-employment phase, when people seek information during
recruitment and after receiving a job offer.
• Employees might seek information about transactional + relational expectations
of their potential employer.
• Transactional 🡪 What are the company’s health coverage plan and promotion
policies before I accept the offer?
• Relational 🡪 What kind of employee assistance or family welfare policies do they
have?
• How do I get this info 🡪 direct inquiry, monitoring, and negotiation
• What can I expect 🡪 over time the expectations of the employee and employer
will match
• Employees can form expectations from two sources: interactions with coworkers
+ perceptions of the company’s culture (Can I form unreal expectations?)
• Psychological contracts are flexible in nature, undergoing constant change based
on interactions with the company and other employees.
• This flexibility allows employees to adapt to changes in the company’s practices.
• If employees hold relatively stable expectations 🡪 any changes in the policies and
practices 🡪 employees’ feeling betrayed unless changes entail offering more
rather than less.
Violation of Psychological contracts

• A violation of the psychological contract occurs when an employee perceives a

discrepancy between the promises made by the employer and the actual
fulfillment of the promises.
• If a company withdraws or changes certain benefits, and those practices are an
employee’s psychological expectation of the company, then that employee will
feel that the contract has been violated.
• Violations of psychological contracts differ from unmet expectations
• The responses to the violation of psychological contracts 🡪 more intense, can
cause feelings of betrayal and the onset of mistrust
• There may be two basic causes for violations of psychological contracts: reneging
and incongruence
• Reneging 🡪 When a company deliberately breaks a promise to employees, either
willingly or because of circumstances
• Incongruence 🡪 when the employee and the employer have different
conceptualizations of the employment relationship
• As an employee, I held certain expectations of the employer. But my actual
experiences are different from these expectations 🡪 I feel that the psychological
contract has been violated
Employee Benefits as Constituting Psychological Contracts
• If employee benefits are a part of employees’ psychological contracts, then it is
important for employers to ensure that employee expectations about benefits
are clearly articulated and flexible 🡪 Role of HR signals
• This will allow employers to avoid any psychological contract violations and the
associated costs (lawsuits, lost trust, low morale, turnover, etc.).
Employer’s violation of contract
• Just as employees have expectations of the employer, the employer is also likely
to have expectations of the employee.
• Incomplete effort, bad citizenship behavior, voluntary turnover, and low
motivation can all be perceived by an organization as breaches of contract by the
employee.
• The actions of the employee might also in some way contribute to the violations
by the organization
• Thus, if the organization feels that employee performance is not what is
expected, it can decide to withhold certain employee benefits, especially
discretionary benefits.
• Effective communication on the part of the organization could ensure that the
psychological contract consists of explicit (rather than implicit) promises
3. Relationship between Employee attitude and Employee benefits

Role of Justice and Perceived Organizational support

• The concept of justice is concerned with the distribution of conditions and goods
that affect individual well-being.
• In a work setting, the distribution of rewards (such as pay and benefits),
information, and other resources will all lead to perceptions of justice.
• Perceptions of justice may be based on the rules by which distributions are made,
the way rules are implemented, or the way decisions are made.
• The basis on which employees are eligible for benefits, the value of those
benefits, how the benefits are administered, and employer decisions about which
benefits to offer to employees would all influence employees’ justice perceptions.
• Goal congruence v/s incongruence
• Benefits provided 🡪 how, when, criteria, value, which 🡪 justice perceptions 🡪
• Distributive justice
• Procedural justice
• Informational justice
• Interpersonal justice
• Consequences 🡪 Job satisfaction, organizational commitment, evaluation of
authority, organizational citizenship behavior, withdrawal, and performance are
all affected by employees’ perceptions of justice along these dimensions
Employee benefits and Justice perceptions
Employee benefits and POS