Benefits that bend.

• Author: Tane, Lance D.
• Position: Flexible employee benefits

Over the last decade, the employee benefit component of the compensation pie has been getting more and more attention from employees and employers. While the reasons differ, the conclusion is the same: Employee benefits are a source of dissatisfaction.

From the employee's perspective, the last decade has been an ongoing process of takeaways, and most employees believe the trend will only accelerate. From the employer's perspective, the cost of benefits, both in absolute dollars and as a percent of payroll, continues to escalate much faster than other costs. Even more troublesome for companies is the realization of just how little control they have over their benefit programs, given the rate of medical inflation, changes in Medicare provisions, and an Internal Revenue Code that changes frequently and doesn't always consider the need for efficacy in employee benefits.

One answer to these problems is flexible benefits. Under flexible programs, companies provide employees with a benefit allowance and the opportunity to choose the benefits they'd like from among options the firm determines.

WHAT'S IN IT FOR YOU?

The concept of flexible benefits has been a very emotional issue. Some people see it as a panacea; some see it as the worst thing that could happen to employee benefits. It's neither. It's a delivering mechanism, with advantages and disadvantages.

What will flexible benefits help you and your company do?

* Minimize negative reactions - Say your company has a fixed medical plan and the employee is paying 10 percent of the costs. Then costs go up 20 percent. Of course, you could increase both the employee's and your own contributions. But even if the company and the employee maintain the same ratio of cost-sharing, the employee only sees his increased contribution. He doesn't focus on the company's increase.

Simply put, flexible benefits allow an employee to choose what to give up. He can have a lower plan that won't require a greater contribution, or he can have a higher plan that will.

* Contain costs - There's no doubt that you can design a flexible benefits plan to increase your costs, decrease your costs, or keep your costs level. However, a mechanism within all flexible benefit programs tends to dampen the effect of benefit cost increases. It's called the portfolio effect or, in less esoteric circles, chicken or beef.

Look at it this way: Putting taste aside, we are theoretically indifferent to eating chicken or beef for dinner if both cost $5 per pound. However, when beef goes u to $8 per pound, we tend to buy less beef and more chicken. A flexible benefit program permits normal economic forces to influence employee selection of benefits in much the same way. When the cost of one benefit option goes up much more rapidly than other benefits, employees buy less of it. Therefore, fewer of your compensation dollars are spent on benefits that are increasing in price, relative to those that aren't.

What are the disadvantages of flexible compensation? First, it's a new concept for employees and you may face some resistance. Second, short-service employees who are close to retirement have no method of directly supplementing the plan, although you may be able to help...