Wednesday, May 4, 2011

Survey Says Employer-Provided Benefits Declining, But Why?

Today's information is gleaned largely from "Prudential's Fifth Annual Study of Employee Benefits: Today & Beyond." For me, the key takeaway from an employee's standpoint is that 43% of employees said that the level of benefits that their company offers was down from a year earlier. This continues a trend that we have seen for the last few years. Pay increases, generally, are meager. What employees have to pay for equivalent benefits is increasing faster than pay. The end result is that an employee's income that is used to other than the necessities of life is shrinking.

Here I diverge from the theme of the survey. We've been down this road before. Employer-provided retirement benefits are decreasing. Defined benefit pensions, once nearly as prevalent as mom and apple pie, are now barely more common than the dinosaur. Cost-sharing in what are considered by most to be core benefits, such as health care, has increased on the employee side. And, all this has occurred while the level of benefits being provided is declining.

Once upon a time in a far-away land (oops, not so far away, but actually right here in the US), companies used to talk about the "deal" between an employer and an employee. The employee would work hard, but frankly, perhaps not as many hours as employees seemed to be working through the period from about 1985 to the early 2000s. In return, the employee would get fair pay with fair pay increases and certain core benefits (retirement and health care primary among them).

What ended this? From this lens, it appears that the beginning of the end was the bursting of the tech bubble. The recession of the early 2000s brought with it a rash of cuts in employee benefit programs. Companies looked for new ways to save money and such benefits were among the primary targets. Initially, we were told that such cuts would be temporary, but temporary is long since gone. That train has left the station.

Frequently, I rail on against those who choose to over-regulate things like executive compensation. But, if we look carefully, it is really only the executives whose total reward package has value that has kept up with or exceeded increases in the cost of living.

I think there is one reason for this that has not been discussed much. It's one of the OBRA brothers, in this case OBRA 93. It added Section 162(m), the foolish million dollar pay cap to the Internal Revenue Code. But, it exempted performance-based pay. And, while this was designed to rein in executive compensation, what it did is it allowed companies and their compensation consultants to design programs with obscene amounts of performance-based pay for top executives. So, executive pay went up, and it went up with the incentive attached to it that if the executives could increase corporate profitability by cutting employee benefits, part of that savings from cutting benefits would go right into the checkbooks of the executives.

So, for all the people in the early 90s who tried to rein in executive compensation, they really found a back door way to cut broad-based employee compensation and benefits. The Prudential survey doesn't say it, but I do.

And so it goes ...

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