Is Your Benefits Package Keeping Up with Compensation Trends?

Information Outlook, June 1997 | Go to article overview

Is Your Benefits Package Keeping Up with Compensation Trends?


Do you know what your total compensation package is worth? Increasingly, many employers are compensating their employees with a combination of salary and noncash benefits - benefits that are often worth 30% of straight salary compensation. When assessing your total benefits package, it is necessary to include all aspects of your compensation. This is because a company that has an average salary for its industry and peer group can have superior short- and long-term incentives and vice-versa. There are five basic components to a compensation package. These are: direct compensation (base salary); short- and long-term incentives; health and welfare benefits; deferred compensation; and employee fringe benefits.

The overall trend in the 1990s has been to move away from the traditional notion of base salary as being the most significant portion of total compensation to incentive pay. Consequently, employers are moving away from solely using traditional straight salary compensation with regular fairly standard annual increases toward using more creative ways of compensating employees through merit and bonus increases.

Further, while traditional, direct compensation (cash plus bonus), is still the largest component of total compensation, each year employee benefits represent an increasing percentage of total compensation. One common explanation for the growth of employee benefits has been the increasing tax rates faced by typical workers. The tax-free status of employee benefits makes them attractive to most employees.

The 1990s have been the decade of expanding benefit options, albeit often coupled with decreased company funding for those options. This will hit most employees hard because, in addition to other cost-cutting measures that corporations implement to save money - such as downsizing, restructuring, and cutting operational expenses - many companies decrease their employee benefit costs by reducing funding for some benefits and eliminating other benefits entirely.

According to data released by the Labor Department's Bureau of Labor Statistics (BLS), benefits costs paid by private industry employers accounted for 28.4% of total compensation costs for the year ending March 1996. The figures are from BLS' annual report showing dollar amounts of wage and benefits collected as part of the Employment Cost Index (ECI) data series. Legally required benefits, such as social security, workers' compensation, and unemployment insurance, averaged 8.5% of total compensation costs and nearly three-tenths of all benefit costs. Other important benefit categories include insurance, paid leave, retirement and savings and supplemental pay, which includes premium pay for overtime, shift pay, nonproduction bonuses, and lump-sum payments provided in lieu of wage increases.

Employee benefits are clearly the second largest component of total compensation. Since benefits currently average nearly 30% of total compensation, it is critical for employees to consider noncash benefits in order to assess their total compensation. Economists have developed the concept of "cash-equivalent value" to measure the value of noncash benefits to an employee. The case-equivalent value approach is fairly straightforward, asking, "What is the minimum amount of additional cash compensation an employee would want to become just as well off as if he or she received the benefits? …

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