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This excerpt, featured in the 17th issue of Money Classic, comes from a story in our July 1977 edition.
Editor's note: This story includes language that isn't inclusive. Preferred language is always evolving, and Money is committed to writing stories that do not discriminate on the basis of race, color, sex (including gender identity and sexual orientation), religion, age or disability.
"Corporations are very much like people," says Thomas E. Wood, a partner in the management consulting firm of Hewitt Associates. "They choose to spend their money in different ways." That goes for the sums they spend on their employees' benefits as much as for their investments in real estate or machine tools.
Big corporations almost all give their employees a certain amount of life and health insurance and a pension. Beyond that, there is enough difference in how much of which benefit each company offers to warrant knowing how close your company comes to the best.
The mid-career employee planning to move up by moving over to another firm may need to be more alert to fringe benefits than the college graduate looking for his first job. Suppose you work in the chemical industry and like the idea of early retirement. You should know that you can retire after 15 years at Du Pont or Abbott Laboratories, but after 10 years at Union Carbide. You should know too that you can't retire until age 55 at Abbott, whereas 50 is old enough at Du Pont and Union Carbide.
Another reason to find out about benefits now is that most companies are not likely to be improving them very much in the next several years. They're too ensnarled in the red tape created under the 1974 pension reform act. Says Michael Jones of Hewitt Associates, "Companies have lots of problems, not just with funding the plans but with figuring out how to administer them to meet government regulations."
Furthermore, most employees are not being goaded by unions to cough up major new benefits. "Right now," says John Zalusky, research economist for the AFL-CIO, "because of high employment and inflation we're looking for job security and wage improvement. As for the fringes, we're concentrating on those that are less expensive, like hearing aid plans."
Fringe benefits have come to account for a lot of money. Since 1965 their cost to companies has gone from $61.6 billion to an estimated $245 billion. That breaks down to 33 cents of each payroll dollar for the average big firm, with at least one, Eastman Kodak, going up to 50 cents on the dollar. Few employees know what their fringes are worth. Pearl Meyer of Handy Associates, a New York management consulting firm, says only some 15% of the mid-level managers she deals with have any clear idea.
A good set of fringes can be viewed, in a phrase from the literature of labor relations, as golden handcuffs that can lock an employee to his company. If a $25,000-a-year family man tried on his own to match the best fringes currently available, many of them tax free, his annual bill could top $13,000. And he couldn't get some of them at any price. Money questioned union and industry benefit specialists and came up with the following summary of today's choicest benefits:
The pension is the oldest fringe benefit, dating from 1875 at American Express Co., and many compensation specialists still single it out as the most important. Few employees would be disciplined enough to save on their own what their company contributes to a retirement plan.
The majority of pension plans call for no contributions from the employee. In sizing up a plan, find out what percentage of your salary it pays at retirement. A fairly standard plan pays 45% at age 65, but the best pension we could find — one given by Whirlpool Corp., the household appliance manufacturer, to its salaried employees — guarantees 60% after 30 years' service. Furthermore, the 60% is above and beyond Social Security and is calculated on the five highest-paid years in the employee's last 10 years of work. Pensions calculated on average salary near retirement keep pace with inflation much better than those that are based on a career average.
To supplement pensions, employers may offer one or another of three plans:
- Thrift savings, currently the most popular of the three, depends on contributions from both the employee and his company. Under a typical plan, the employee saves 6% of his pay through payroll deductions, and the company matches half of that. Both contributions go into a trust fund. Because they are handling their employees' money, many companies make conservative savings-plan investments, commonly in bonds.
- Profit-sharing plans put aside a percentage of the company's annual profits to be invested for its employees. The contributions can go up to 25% of the profits, but in a bad year a company may contribute nothing. In many plans, employees can contribute too — as much as 10% of their individual salaries. Profit-sharing funds invested heavily in stocks took a beating in the 1973-74 bear market. But as the market comes back, "small and medium-sized companies are trending toward them," says Walter Holan, vice president of the Profit Sharing Council of America, a trade association. The general rule, Holan says, "is that young employees with years of work ahead of them will do better under profit sharing, but older employees are best off with a pension."
- ESOPs (employee stock ownership plans) systematically give employees stock in the company they work for. More companies have been offering them because recent legislation gives the company a tax benefit that, in effect, pays for the stock. But even as an extra benefit, the tax-financed ESOPs are no great shakes. For example, last May AT&T announced plans to install an ESPO under which an eligible Bell System employee would be credited with 1.6 shares, worth roughly $100 at the time the announcement was made An A&T spokesman admitted that "relatively few shares" were being given to any individual employee, but said the concept of an ESOP would give employees "a more personal stake in the business."
- If any of these plans is provided in addition to a pension, it's a good sign: the company can afford to contribute to more than one retirement program and is liberal enough to do so. But if one of them is offered instead of a pension, beware: any plan that rises and falls with the fortunes of your company or the stock market can be shaky.
The best hospital and major-medical insurance available to corporate employees probably can't be duplicated by anyone buying insurance for himself and his family. Says a spokesman for Blue Cross in New York City, "When our salesman goes to a big firm, their treasurer may say, 'We want to cover alcoholism, psychiatric care, cosmetic surgery. You tell us what it'll cost and we'll pay for it.' Big groups can dictate tailor-made contracts to us."
Company health insurance typically covers hospitalization in a semiprivate room for up to a year for an employee and his family. Any "reasonable and customary" surgical fee will be paid. Most additional expenses are covered by a major-medical plan. Each year, after the employee has paid the first $100, the company's insurer pays 80% of any further bills up to a maximum lifetime coverage of $250,000 or so.
The best plans, though, have a $50 deductible and unlimited coverage. Some companies, Prudential Insurance for one, also have a so-called circuit breaker written into their plans: if an employee's out-of-pocket expenses reach a certain amount (at Prudential the figure is $1,000 per year), the medical plan will pay $100 of any additional bills. In 1975, 24% of members of group major-medical plans had circuit breakers in their policies.
Most companies with medical insurance pay the entire premium, but Murray Becker of Johnson & Higgins, an employee-benefits consulting firm, suggests that's going to change. "The tremendous increase in costs is making employers anxious to pass some of it on," he says.
Found until recently only in the contracts of pace-setting unions like the United Auto Workers and Steelworkers, dental insurance has become the fastest-growing new health benefit. An estimated 40 million people have it. "Probably 99% are insured by their employers," says James Marshall of the American Dental Association's Council on Dental Care Programs. "Individual policies are virtually unavailable because insurance companies find the risk too high. People in the market for such policies tend to need major dental work. Once it's taken care of, they drop the insurance."
The most generous dental plans have no deductible; they pay 100% of the cost of preventative treatment, 85% of restorative work like fillings and root canal work, but only 50% of bridgework or orthodontics. Maximum yearly coverage, typically $750 a person, goes up to $1,000 in some plans.
Group life insurance usually equals twice the employee's salary, but in some companies it goes as high as five times salary. Often the company pays the whole premium (when it does, the employee pays income tax on the value of coverage over $50,000). Even if the company contributes only part, though, the insurance is cheap because it is bought at a group rate.
Group insurance is term insurance; it expires when the employee retires, unless he converts it to whole life — at a very high premium rate. Newer plans, including one that covers employees of the American Council of Life Insurance, the industry's trade association, continue insurance into retirement with a reduced benefit.
A fairly standard disability income policy guarantees an employee 60% of his salary, starting six months after he becomes incapacitated. He may continue to receive as much as $3,000 a month until age 65.
Company plans almost invariably tie in with Social Security disability benefits, which start five months after an employee becomes permanently disabled. Since Social Security is pegged to the cost of living, check your company plan to make sure the company benefit won't be reduced as government payments increase; such reductions are illegal in at least 15 states. Also find out whether you continue to accrue pension credits while disabled.
A development to watch for, according to John Hickey of Kwasha Lipton, an independent actuary firm in Englewood Cliffs, N.J., is pregnancy disability. "The recent Supreme Court decision [that women cannot claim the benefit as a civil right] went against the tide," he asserts. "Already New York State has ruled that if a woman applies for disability, her employer must provide it for as long as a physician certifies it is needed."
Employees who want more time away from the job are getting it — at least until they reach a certain job level. Don Sullivan, vice president of Towers Perrin Forster & Crosby, a management consulting firm, says, "The trend is toward more than two week's vacation. It's moving near four — except with executives, who often can't take all of their weeks, and sometimes don't want to." At the other end of the spectrum, the United Steelworkers' contract, which covers employees of the major steel companies, gives a worker who meets his plant's seniority requirement up to five weeks of annual paid vacation and 13 weeks every fifth year.
Here and there, firms offer unusual perquisites to a broad spectrum of employees. Airlines give almost free travel; department stores give employee discounts. Daily exercise programs at a gym, sometimes right in the office or plant, allow people in some companies to pant through waist-trimming, heart-tuning regimens. Sabbatical leaves are much rarer but not unheard of. Social-service sabbaticals at Xerox give employees of any rank up to a year's salary while they are off doing good works of their own choosing. The Los Angeles law firm of Munger, Tolles & Rickershauser allows its 29 lawyers to take about three months off with pay after six or seven years with the firm.
A few corporations give employees a chance to do some learning and thinking on their own time. At Kimberly-Clark, in Neenah, Wis., the company that makes Kleenex, an employee can get an annual sum, based on company earnings and the employee's job performance and salary, to take courses of his own choosing at nearby schools. Employees pay income tax on this kind of educational aid.
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