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Benefits
Employees always cost more than their cash compensation. There are benefit costs involved with hiring employees, and these benefit costs can be divided into two categories:
Government-mandated benefits. Government-mandated benefit programs include Social Security, unemployment insurance, workers' compensation, and specific state programs. For the most part, these are fixed costs. However, some are experience-rated, meaning the organization can influence the total cost. If the organization has low draws on its workers' compensation policy, for example, then its required contributions will also be low.
Employer-provided benefits. These are the benefits that organizations offer in order to remain competitive in the labor market. There's an ever-expanding list of these benefits, and their cost has risen dramatically over the years. In particular, annual health insurance costs are rising faster than any other aspect of compensation. Benefits typically include:
- Medical Coverage
- Dental Coverage
- Vision Coverage
- Retirement such as 401(k)
- Paid Time Off (e.g., Vacation, Sick Leave, Holidays, etc.)
- Life Insurance
- Short-Term Disability
- Long-Term Disability
Although uncommon, benefits are sometimes offered as a substitute for salary increases. Depending on the employee, benefit eligibility may be "worth more" than a salary increase. This scenario would typically occur in a year when a new benefit plan is being implemented.
Here's an example:
In lieu of pay raises, Jennifer's company is adding dental insurance to its employee benefits which is being offered to all of its 100 employees. This will raise the organization's annual total labor costs by $42,000 (or $420 per employee). But this benefit is worth substantially more this year to Jennifer, who can now get the dental work she needs and be charged only minimal co-payments out of her own pocket.
It's important to keep in mind that new benefits, once granted, also become fixed costs. This has led many organizations to rely on temporary, part-time, or outsourced employees, since they may not need to provide these groups with benefits.