The History and Role of Benefits in the Total Compensation Model

“Total compensation is everything the company provides an employee in exchange for working. It includes base salary, bonuses, benefits, perks and on-site amenities. Total compensation you that you are receiving additional compensation, yet rarely discloses the full amount compensated during the entire year. This lack of disclosure often leads employees to feel underpaid for their time and services” (Webster, 2013).

Total Compensation

Since the latter years of the 19th century, there has been a dramatic change and an evolving effect of what people know as benefits. When people think of benefits, the first thing that comes to mind is insurance. In fact, there are several benefits that are offered today that weren’t offered years ago. The makeup of benefits has evolved over time and has become a major asset to any company’s compensation model. In fact, besides actual payroll with wages, benefit expenses are the second highest expense that companies pay out. Although it can be a hassle, having an attractive benefits package is an eye catcher for prospective employees and will definitely help with being able to retain employees and hire good workers as well. “Conceptionally, total compensation covers all the psychological and material rewards that parties consider relevant to the employment exchange” (Martel, 1982). When a business researches and continues to stay updated on what benefits are relevant to prospective employees, it will know what to offer the employees. “When employees have the ability to pick and customize benefits according to their needs, it may encourage participation in benefits plans. This can provide employers and employees with a better return on their benefits investment” (The Importance of Employee Benefits, 2018). With this one has to pose the question; What is the purpose of offering benefits? “There are several reasons. First, as technology and the work environment changes, we need people to retire. If you don't provide employees with some resources for retirement, you'll find it difficult to get the employees to retire. Second, companies want to provide a benefit whose value is greater than the cost” (Tane, 1992).

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Base Salary

Base salary is a fixed amount of money that an employee receives in return for the work performed. When referring to the total compensation model, base salary is only a third or less of the compensation an employee receives. This is the reason why employees are informed of the benefits available during the interview process. Even with a bigger base salary, some employees will decline a job offer if the benefits of the job aren’t attractive enough to stay long-term. Base salary is a little tricky because companies have to figure out how to determine a base salary for the employees. Some of the things that go into base salary is an employee’s experience, educational background, and the external market. The base salary does not include bonuses, other forms of compensation, or benefits to an employee. However, with a decent base that is competitive to external markets of the same industry, an employee will then be able to determine if the benefits are worth staying or not. Companies must continue to adapt to the ever-changing market. “When the job market improves, those companies will lose key workers to competitors—and suffer from reduced employee productivity” (Scorza, 2018).

Retirement

Back in the days of the Industrial Revolution, retirement wasn’t what we see it is now. When workers were physically unable to work any longer, retirement was the best option. Because of the lack of medication and resources that are available to people now, the wear and tear on the body was much more evident at an early age. In fact, the life expectancy was only around thirty years old at that time. People weren’t capable of doing manual labor any more so companies and organizations came up with a plan to not not only attract the workers but to give them something to look forward to after a hard and long days of doing manual labor was over. Basically, if an individual got older, that individual had to solely depend on family to take care of them until death. Because of the amount of years workers had to work, death came soon after retirement. There wasn’t sufficient access to nursing homes and other facilities to assist with living. There were some pension plans that were available at the time, but those plans were a rare commodity and many people didn’t have access.

Once the industrial revolution begins, many long-term farmers retired farming and joined the workforce in order to gain more income and have job security, something the farmers were familiar with. Whenever there is a war at any time, jobs are created in many different industries. If farmers had to leave farming duties just to make more income, making the decision to do otherwise and seek other employment in order to support the farmers’ families was the better choice. This created a problem for employers. Not only did employers need to maintain adequate staffing in order to operate efficiently, but there was also a need to figure out a way to give back to the employees. This would help employees to not make the decision to leave and seek employment elsewhere. Employers were forced to be creative and find ways that make the organization attractive for future employees to desire to work and stay there.

” Economic constraints and accompanying inflationary pressures of World War II forged changes in compensation practices of many employers. The War Labor Board, charged with maintaining price stability, placed restrictions on cash-wage increases employers could offer. With a short supply of labor to produce a growing demand for war products,4 employers began offering nonwage benefits, which included insurance, pension plans, and holiday and vacation leave, as a means to attract and retain workers” (Moehrle, 2001).

Along with this, employers needed to find a way to get employees to leave if the workers were too old and were unable to be as efficient as before. In order to meet this need, pensions were created.

The first pension plan was created by the American Express Railroad company. Many different industries expressed interested in creating pension plans as well, so the companies created pensions as well. In order to qualify for these pension benefits, organizations made it extremely hard for employees. Not only were there strict policies, but it was almost set up to basically not have to payout as much at the end of an employee’s employment term. There were rules about how many years of employment it takes to be eligible for these pension benefits, it took a while longer to be fully vested in the plan, and the benefits of those plans weren't as big as an employee expects from a company employee had worked for with long tenures.

In 1913 the income tax was created to be able to distribute the taxes evenly amount American citizens. The United States realized it wasn’t bringing in enough taxes from imported and exported goods. The U.S. also realized that the tax of certain goods wasn’t enough money as well. The U. S. was forced to come up with a solution to figure out a way to help with the tax burden, so permanent income tax was created for all citizens of the United States. After this occurred, many Revenue Acts were created for businesses and employers that allowed these pension plans to be tax-free. This was a huge benefit for employers because it allowed the employees to save money. Pensions eventually became the root of collective bargaining. Many unions and industrialized companies adapted pensions as retirement plans for its employees. A few years later the federal government’s employees were introduced to pension plans as well and adopted the philosophy as a benefit.

Because most of these pension plans were made for the older workers, the government created the Social Security Act in 1935. The purpose of the Social Security Act was a benefit to not only the older workers but also to the younger workers as well. This allowed employees to be able to have an income after turning a certain age. This allowed much younger workers to take the place of the older workers and keep the workforce and the economy young, intelligent, and more productive than before. Compensation is important to the younger generation as well, so a good compensation package helps the organization and the young worker as well. “So, while factors such as respectful treatment and trust remain important, compensation is a critical job satisfaction factor—especially among Millennial and Gen X employees” (Miller, 2018).

After pensions plans were created, there were other changes over the years to accommodate the retired employers. The biggest change in history was the adapting of the 401k policy. This allowed employees to be able to deduct tax free money from the wages earned and placed the funds into a retirement account. As long as the individuals are full-time employees, this plan is available for anyone who wants use of it. 401k plans are transferrable from job to job and have many other benefits along with it as well. A lot of employers also match with the employees by crediting the individual’s 401k account the same amount of money the actual individual is placing in. With this retirement plans, employees are able to borrow from 401k plans as well for a fee. Retirement plans have become more and more important as the years have gone. The way the economy is steadily evolving and changing, many people don’t know how long this type of plan will be made available.

Insurance Benefits

“When looking at total compensation, companies offer common types of benefits. Typical compensation packages include health insurance, performance bonuses, vision and dental insurance and retirement plans. Each of these has a cost to the company and a value to the employee” (Webster, 2013).

An individual may argue that healthcare benefits is one of the most important benefits that an employee has access to. Without insurance, healthcare premiums are extremely expensive in the U.S. There are some countries who offer free healthcare. It’s not free in the United States and it is a requirement for all organizations to provide it for exempt full-time employees. If an individual declines to receive health insurance, there is a penalty on the taxes filed from the IRS, because of the new Affordable Healthcare Act created by Barack Obama.

Most employers pay the majority of the premium on health insurance which leaves the remaining amount to be paid by the employee. Also, there is normally an option to be able to cover an employee’s spouse, children, or family as a whole for a small percentage of what a normal premium is under normal conditions. There are many facilities who won’t treat patients without proof of insurance and a paid deductible. People tend to pile up hospital bills all over the years and not pay those bills, because there is no real need to pay the bills off. Because being healthy is a necessity, medical bills on a credit score aren’t big enough of an issue to an organization that runs an individual’s credit score. In all, health insurance helps an individual more than it hurts an individual. It’s better to have it and not need it than to need it and not have it.

There is also other insurance coverage such as dental insurance and vision that are important to an employee as well. The employee’s portion on this is not as expensive but normally covers quite a bit of the amount that an employee pays without it. These are additional insurance coverages that are not mandatory to have as an employer, but it is definitely attractive to the employee as an add on to having health insurance. One thing about these coverages, is that there is an option to be double covered through multiple policies or agencies, and that lowers some of the employee’s out of pocket expenses as well.

Having insurance wasn’t always an attractive option for most people. At the beginning of the 20th century most people did not have insurance. There were so many diseases still around with no cure, there weren’t many hospitals available to attend, and the life expectancy was short. Many people felt as if it was pointless to have it because it didn’t really make that much of a difference in

lives. As time went on, the hospitals and medical fields began to evolve over time. Hospitals went from being the last option for most people to a place of security where people have an opportunity to get help at hospitals that were clean, operated by well-skilled and trained employees and doctors, and there were more cures and vaccinations made available to reduce sickness. Hospitals soon discovered that even with all of the changes, people still weren’t coming to the hospital unless patients were extremely ill. In 1929, Baylor University Hospital in Dallas created a plan that allowed employees to pay monthly dues in exchange for a certain amount of free hospital visits. The amount paid by the employee was the same across the board, but that was a risk the hospitals were willing to make in order to draw stable income into the facility. After the Great Depression, this idea spread across the nation and eventually led to the National Labor Relations Act of 1932 which made health insurance mandatory for companies.

“Prevalence of employer health plans skyrocketed from 9% in 1940 to 70% of all employers by the 1960′s. Today, employer health plan coverage has declined to about 60% of all insured Americans under age 65. In total, about 83% of Americans under age 65 are covered by an employer, individual health plan, or Medicaid but the other 17% remain uninsured because they do not have such coverage or are not poor enough to qualify for Medicaid” (The History of Benefits). Some people choose to just pay the penalty at the end of the year instead of spending unnecessary money on health insurance. Although healthcare is very expensive things like COBRA, HIPPA, CHIP, MEDICAID, and other resources are made available to those who qualify. Yes, there are still changes and adjustments that are made to improve health insurance over time, but people are still thankful that is an option rather than paying everything out of pocket. Overall, it still continues to be a deciding factor for employees when looking for a job and staying with that organization as well.

Other Benefits

Some of the other benefits offered by employers are paid time off, sick time off, life insurance, short and long-term disability, child care expenses, gym membership discounts or reimbursements, FSA, HSA, wellness programs, tuition reimbursement, etc. None of these benefits are mandatory for an organization to provide. In order for companies to be competitive, these are some of the extra perks and benefits that are the icing on the cake for some employees. Some of these benefits may never be used by employees but being able to have access and options is what’s most important.

“Millennials are largely driving this shift, as they look for work/life balance and a socially conscious corporate culture” (Barret, 2018). Having work-life balance is key to most employee’s happiness. Being able to be successful and thrive at work as well as being able to benefit outside of work is just as important. Paid-time off and sick-time off, whether accrued or given annually, is a benefit that employees look forward to being able to use. Sometimes people need vacations, things come up, family situations, deaths, etc., and this time is used on those occasions. Employees are paid for time off if the hours are available. Some places allow unpaid time off as well for employees who don’t have enough PTO or whom were unable to request time off in a decent amount of time. There are so many stipulations and rules to this time, however for larger families, this benefit has the power to make or break deal.

Short term and long-term disability are benefits that allowed an employee to get paid a percentage of the worker’s salary if the individual is unable to work and disabled. These benefits may be used for special surgeries, injuries, recovery time, etc. One may never know what type of situations that will come up in life, so having this option is beneficial. Of course, child care can sometimes be one of the biggest expenses for employees. Child care costs continue to rise all over the world and most people have to be low-income in order to qualify for assistance. This is a good benefit not only to families, but especially to single-parent homes who struggle to pay bills, go to work, and pay for childcare.

The overall reason for total compensation is for an organization to be able to attract good workers but for it to also have a positive impact on the workers that are already employed. “To achieve your goals, you need to encourage the type of behavior that will lead to high performance. As previously discussed, total compensation management is a forward-driving behavioral strategy. It is not an after-the fact rewards strategy” (Weldon, 2012). Total compensation is not just income only, but it’s everything other than wages that makes up the compensation package that an employee receives. It will always be one of the most important aspects of running a business. Once a business masters this skill and has the right tools in place in order to offer a decent compensation package competitive in the market, it will attract the right employees for its business.

References

1. Barrett, R. (2018). Why the most innovative employers are rethinking total compensation. [online] Employee Benefit News. Available at: https://www.benefitnews.com/news/benefits-a-growing-part-of-compensation-equation [Accessed 15 Nov. 2018].
2. Martel, P. (1982). A Model of Total Compensation in a Market Comparability Framework. Public Personnel Management, 11(2), 148. Retrieved from https://zeus.tarleton.edu/login?url=https://search-ebscohost-com.zeus.tarleton.edu/login.aspx?direct=true&db=bth&AN=6364305&site=eds-live
3. Miller, S. (2018, April 11). Better Pay and Benefits Loom Large in Job Satisfaction. Retrieved October 31, 2018, from https://www.shrm.org/resourcesandtools/hr-topics/compensation/pages/pay-benefits-satisfaction.aspx
4. Moehrle, T. G. (2001). The evolution of compensation in a changing economy. (Report on the American Workforce). Compensation and Working Conditions, (3), 9. Retrieved from https://zeus.tarleton.edu/login?url=https://search-ebscohost-com.zeus.tarleton.edu/login.aspx?direct=true&db=edsgbe&AN=edsgcl.91915577&site=eds-live
5. Scorza, J. (2018). Benefits Can Boost Employee Loyalty. [online] SHRM. Available at: https://www.shrm.org/ResourcesAndTools/hr-topics/benefits/Pages/Benefits_Loyalty.aspx [Accessed 15 Nov. 2018].
6. Tane, L. D. (1992). Benefits that bend. Financial Executive, 8, 35–40. Retrieved from https://zeus.tarleton.edu/login?url=https://search-ebscohost-com.zeus.tarleton.edu/login.aspx?direct=true&db=bft&AN=511938310&site=eds-live
7. The History of Benefits. (2018). Retrieved October 31, 2018, from http://workplaceconsultants.net/commentary/retirementtsunami/the-history-of-benefits/
8. The Importance of Employee Benefits. (2018, July 23). Retrieved October 31, 2018, from https://www.paychex.com/articles/employee-benefits/importance-of-employee-benefits
9. Webster, S. (2018, June 28). The Difference Between Base Salary & Total Compensation. Retrieved October 31, 2018, from https://smallbusiness.chron.com/difference-between-base-salary-total-compensation-21449.html
10. Weldon, D. (2012). Linking Total Compensation to Performance. Compensation & Benefits Review, 44(3), 149–153. https://doi-org.zeus.tarleton.edu/10.1177/0886368712459843

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