On The Job
Coming soon: benefits you can vary
Personnel officials often complain that employees are not properly grateful for the fringe benefits that now cost companies nearly 30% of payroll. Part of the reason for ingratitude, according to psychologists, is that employees rarely have any say in fixing those benefits: the length of vacation, the size of the life insurance policy, the extent of medical coverage and so forth. Some highly paid executives have benefits tailored to their needs, but the majority of employee-benefit packages are designed to suit a hypothetical typical employee — who probably does not really exist.
“Flexible compensation” may soon change things. Thomas E. Wood, a partner in Hewitt Associates, a consulting firm based near Chicago that is in the vanguard of flexible-compensation research, defines it in principle as “a compensation system under which individuals have some say in the form and timing of part or all of their total pay and benefits.” In practice, he explains, the vital element is choice within certain limits fixed by the company: an employee can arrange to buy more or less of a benefit than the company would ordinarily provide for him. A young engineer with a growing family might beef up his medical plan by opting for a lower deductible, while his older boss might put more money into his retirement account and less into medical insurance.
Clifford L. Sherran, vice president for human resources of Sybron Corp., a Rochester, New York, maker of health products and instrumentation, thinks that companies might be better able to attract and keep employees by involving them in decisions about their individual benefits. Wood reports that at least eight firms — two banks and six corporations—are getting flexible-compensation plans ready. Three are hoping to start them during 1973. Companies studying the idea, all of them known for innovation in employee benefits, include Xerox, Cummins Engine, Educational Testing Service and TRW’s West Coast systems unit. The ice is ready to break, and once it does, flexible compensation “should spread pretty rapidly,” says Ray N. Olsen, TRW’s compensation director.
One large company is considering a plan that would work as follows for a 35-year-old employee (call him Jones) earning $20,000 a year: Vacation. Jones can pocket an extra $7.40 weekly by sacrificing a week’s vacation; if he wants an additional week instead, he will have an equal amount deducted from his paycheck.
- Life insurance. The present policy, for which Jones pays nothing, is for an amount equal to his annual salary. Cutting back to a $10,000 policy will increase his weekly check by $1.70; doubling his coverage to $40,000 will cost him $2.50.
- Medical and hospitalization insurance. Jones can change the company-paid plan to a high-deductible one that will cost his company less; that saving, passed along to him, will add $5 to his weekly check. Or he can switch to a low- deductible program that will reduce his take-home pay by $5.
- Accidental-death insurance. A $50,000 policy to supplement his life insurance will cost Jones 95 cents a week.
Jones decides on a shorter vacation, a low-deductible medical plan and life insurance protection of $10,000, forgoing the accidental-death supplement. The result will increase his take-home pay by $4.10 a week — more than $200 a year. His company, like others, will let him rearrange his choices annually to keep up with his changing needs.
A fixed amount of protection will still be obligatory. No one would be able to drop all life insurance coverage just to get more cash, even if he wanted to. Certain benefits would probably be excluded from the “flexible” category. Olsen of TRW thinks that retirement pay, for instance, is “too important to be juggled around,” and will stay in its present form even if TRW decides to go ahead with flexible compensation.
Why has flexible compensation been slow to take root? There are several reasons. Insurance carriers have hesitated to write group policies when no one knows how many employees will pick which options. Some administrators fear that the system will be hopelessly complex. Corporate benefits officers are reluctant to take a chance with an untested concept.
That corporate caution may be disappearing, especially since several insurance companies that handle group life and medical coverage have agreed to underwrite some flexible-compensation plans, at least on a trial basis. Also, reprogramming computers to keep track of employees’ choices has proved simpler than some experts had predicted.
Most supporters of flexible compensation believe that it can be offered to all employees — blue collar, white collar and management — not just to a few privileged top executives. A benefits program, they claim, can be reasonably flexible at little extra cost to anyone. It may mostly be a simple case of shifting a few dollars a month from an unwanted benefit to one more highly prized.
The switching premium
What does it take to entice a successful executive to change jobs if he likes it where he is? A pay raise of 30% or more, according to Handy Associates, one of the largest U.S. executive recruiters. In the early 1960s, hiring a happy executive away usually cost his new employer no more than a 20% increase on his old salary, says Millington McCoy, an assistant vice president at Handy. By mid-decade, the premium required to induce a contented man to switch had climbed to 25%.
The price is still going up. Some recent examples of the switching premium from Handy’s records: A marketing manager, 29, now earning $60,000, up from $45,000 in his old job. A general counsel, 38, now at $40,000 plus bonus, up from $30,000 without bonus. A general manager, 46, whose new job pays $80,000 and a bonus, up from $60,000, no bonus. A company president, 41, now earning $125,000, up from $85,000.
Only an executive with an excellent record can command such a premium. Mrs. McCoy says that the size of the premium reflects the continued scarcity of top people, and she sees the premium rising to 40% in ten years. The executive shortage is compounded by a demographic reality: because of the low birth rate during the Depression, there are relatively few executives entering their prime years, the late thirties and early forties. — Avery Comarow