do employers/ employees still need employee benefits?

i

Do Employers/Employees StillNeed EmployeeBenefits?

EBRIEMPLOYEE

BENEFIT

RESEARCH

INSTITUTE®

Edited by Dallas L. Salisbury

EDUCATION

& RESEARCH

FUND

Do Employers/Employees Still Need Employee Benefits?

ii

© 1998 Employee Benefit Research InstituteEducation and Research Fund2121 K Street, NW, Suite 600Washington, DC 20037-1896(202) 659-0670Web site www.ebri.org www.asec.org

All rights reserved. No part of this publication may be used or reproduced in any manner whatsoeverwithout permission in writing from the Employee Benefit Research Institute Education and ResearchFund except in the case of brief quotations embodied in news articles, critical articles, or reviews. Theviews expressed in this publication should not be ascribed to the officers, trustees, members, or othersponsors of the Employee Benefit Research Institute, the EBRI Education and Research Fund, or theirstaffs. Nothing herein is to be construed as an attempt to aid or hinder the adoption of any pendinglegislation, regulation, or interpretative rule, or as legal, accounting, actuarial, or other such profes-sional advice.

Library of Congress Cataloging-in-Publications Data

Do employers/employees still need employee benefits? / edited by Dallas L. Salisbury.p. cm.

Includes bibliographical references.ISBN 0-86643-090-31. Employee fringe benefits—United States. 2. Compensation management—United States. 3. Labor

economics—United States.I. Salisbury, Dallas L. II. Employee Benefit Research Institute (Washington, D.C.)HD4928.N62U6273 1998331.25'5'0973—dc21

98-19898CIP

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for employee benefits research

EBRIEMPLOYEE

BENEFIT

RESEARCH

INSTITUTE

The Employee Benefit Research Institute(EBRI) was founded in 1978 with the mission of:“To contribute to, to encourage, and to enhance thedevelopment of sound employee benefit programsand sound public policy through objective researchand education.” EBRI is the only nonprofit, non-partisan organization committed to original publicpolicy research and education on economic securityand employee benefits.

EBRI does not lobby or endorse specific ap-proaches. Rather, it provides balanced analysis ofalternatives based on the facts. Through its activi-ties, EBRI is able to fulfill its mission.

Since its inception, EBRI’s membership hasgrown to represent a cross section of pensionfunds; businesses; trade associations; labor unions;health care providers and insurers; governmentorganizations; and service firms, including actu-arial firms, employee benefit consulting firms, lawfirms, accounting firms, and investment manage-ment firms.

Today, EBRI is recognized as one of the mostauthoritative and objective resources in the nationon employee benefit issues—health care, pensions,and economic security.

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Table of ContentsPreface .................................................................... viiAbout the Authors .................................................. ix

Introduction: Do Employers/EmployeesStill Need Employee Benefits?Christopher R. Conte

Introduction ...................................................... 1Forces of Change ............................................... 1Rising Costs, Tighter Controls ......................... 2Benefits and Employee Performance ............... 3Meeting Employee Needs ................................. 3Policy Implications............................................ 4Getting to Yes .................................................... 5

1. Employee Benefits: Here Today, HereTomorrowMichael R. Losey

Introduction ...................................................... 7Core Benefit Packages ...................................... 7Rising Costs....................................................... 8Conclusion ......................................................... 9

2. Do Employers/Employees Still NeedEmployee Benefits? Yes.Charles G. Tharp

Introduction .................................................... 11Rapid Change .................................................. 11Plan Replacement ........................................... 12Conclusion ....................................................... 13

3. The New Deal: Employee ResponsibilitiesDale L. Gifford

Introduction .................................................... 15The Volunteer Organization ........................... 15Broadening the Definition of Benefits ........... 16Providing Challenging Work .......................... 16Shared Responsibility ..................................... 17Becoming an Expert Buyer ............................ 18Conclusion ....................................................... 18

4. Do Employee Benefits Figure in TopManagement’s Business Agenda?Francis N. Bonsignore

Meeting Business Objectives .......................... 21People Resources ............................................. 21Incentives and Rewards ................................. 21The Prevailing Business Logic ....................... 22A Changing Context ........................................ 22The Employer’s Decision Context .................. 23The Questions ................................................. 23Benefit Types .................................................. 23The Employer as Distributor ......................... 24The Provision of Core Benefits ....................... 24The Employer’s Life Cycle .............................. 25Leverage .......................................................... 25“New Age” Benefits ......................................... 25Employers’ Expectations ................................ 25Employees’ Valuation of Benefits ................... 26Employers’ Valuation of Benefits ................... 26The Changing Context .................................... 26A New Model ................................................... 26

5. Benefits: Labor Strategy for the FutureRonald Blackwell

Introduction .................................................... 29Different Views of Success.............................. 29Historical Perspective ..................................... 29Job Insecurity and Knowledge Hording ........ 30Pension Assets................................................. 31Conclusion ....................................................... 32

6. The Key to Successful Downsizing: PartnershipJames King

Introduction .................................................... 33Reinventing Government ............................... 33Work Place Partnerships ................................ 33Privatizing Investigations .............................. 34Expanding Diversity ....................................... 34Measuring Total Compensation ..................... 35Conclusion ....................................................... 36

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7. The Gradual Erosion of Employment-BasedBenefitsRobert D. Reischauer

Introduction .................................................... 37Seven Conditions That Support the System of Employment-Based Benefits .................. 37The Public Policy Response ............................ 40Conclusion ....................................................... 40

8. Employers Need to Make the Case forEmployee BenefitsJames A. Klein

Introduction .................................................... 43The Current System ....................................... 44Conclusion ....................................................... 44

9. Pension Issues as Viewed by the PensionBenefit Guaranty CorporationDavid M. Strauss

Introduction .................................................... 47Meeting the Challenges .................................. 47The Virtual Town Hall .................................... 47Minimizing Red Tape ...................................... 48The ERISA Mandate ....................................... 48Conclusion ....................................................... 49

10. A Congressional View: The Case forEmployment-Based BenefitsCongressman Earl Pomeroy

Introduction .................................................... 51An Erosion of Private Benefits ....................... 51Financial Pressure and the Erosion

of Benefits .................................................... 51The Positive Effect of Employee Benefits ...... 52The Future of Benefits .................................... 53Conclusion ....................................................... 53

Appendices

A. Pink Slips, Profits, and Paychecks:Corporate Citizenship in an Era of SmallerGovernmentRobert B. Reich

Introduction .................................................... 55The End of the Social Compact ...................... 56The Trap of the Old Economy......................... 56The Consequence ............................................ 57The Limits on the Public Sector ..................... 58Corporate Responsibility Revisited ............... 58A Modest Proposal .......................................... 59A National Discussion .................................... 60Conclusion ....................................................... 60

B. Job Creation and Employment Opportunities:The United States Labor Market,1993–1996Council of Economic Advisers with the U.S.Department of Labor, Office of the ChiefEconomist

Executive Summary........................................ 61Introduction .................................................... 62Job Creation .................................................... 62The Quality of Jobs ......................................... 62The Challenges Created by a Dynamic Labor Market .............................................. 66

C. Bibliography .................................................... 69

D. List of Policy Forum Attendees ...................... 71


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About EBRI-ERF Policy ForumsThe Employee Benefit Research Institute-Education and Research Fund (EBRI-ERF) holds two policyforums per year. The goal of the policy forums is to bring together a cross-section of EBRI sponsors,congressional and executive branch staff, benefit experts, and representatives from academia, interestgroups, and labor to examine public policy issues. It is a roundtable discussion featuring verbal andwritten exchange among speakers and participants. The roundtable format is designed to encouragediscussion.

Past EBRI-ERF policy forums include:

04/30/97 “Retirement Prospects in a Defined Contribution World”

12/04/96 “Assessing Social Security Reform Alternatives”

04/30/96 “Comprehensive Tax Reform: Implications for Economic Security and Employee Benefits”

12/07/95 “The Changing World of Work and Employee Benefits”

05/11/95 “When Workers Call the Shots: Can They Achieve Retirement Security?”

10/26/94 “The Future of Employment-Based Health Benefits”

05/04/94 “Retirement in the 21st Century: Ready or Not?”

10/06/93 “The Changing Health Care Delivery System”

05/05/93 “Pension Funding and Taxation: Achieving Benefit Security”

12/01/92 “Rationing: Making Choices and Allocating Resources in the Health Care Delivery System—Implications for Access, Quality, and Costs”

04/29/92 “Paternalism vs. Empowerment: What Benefits Should/Will Employers Provide?”

09/25/91 “Retirement Security in A Post-FASB Environment”

05/02/91 “Pension Portability and Preservation: Assuring Adequate Retirement Income in the21st Century”

10/04/90 “Winners & Losers in Reforming the U.S. Health Care System”

05/03/90 “Assessing the Implications of Proposals for Pension Fund Taxation”

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PrefaceLast year The Wall Street Journal cited EBRI’sinterest in the question of whether employers andemployees still need employee benefits and posedthe question, “Need anyone ask the question?” Theneed is greater than ever. Note, for example, thediscussion of comprehensive tax reform.1 One of theprimary objectives in pushing comprehensive taxreform is tax neutrality, which would eliminate allfavorable tax treatment for all employment-basedbenefits. This would shift the entire system to oneof individual choice and could bring an end toemployer involvement. And an end to employeebenefits as we know them.

The dynamic of the question, “DoEmployers/Employees Still Need Benefits?” toucheson some of the issues that reflect what is currentlyhappening and what we have been tracking at theEmployee Benefit Research Institute for manyyears concerning the changing structure andnature of employee benefit programs and thenature of decision making as it pertains to theseprograms.

I recently spoke to the National Coordinat-ing Committee of Multi-Employer Plans, a rela-tively large entity that represents plans thatinclude 10 million participants in health, welfare,and retirement programs. The opening presenta-tions included three points that relate directly tothe need issue. The first was the frequency withwhich—in the midst of union organizing—many ofthese member organizations are being asked byyounger individuals why they should join an entitythat has a retirement program, a defined benefitplan, that may never benefit them. An interna-tional president noted that an even more funda-mental question is increasingly being heard fromthe young: “Why are you requiring me to havehealth insurance? I know I’ll never get sick.” Whilemany of us have run into these questions, they

were brought up in a discussion of work placechanges in an environment of organized labor andjointly trusteed plans, where member organizationsare facing questions that traditionally they did notface.

For instance, in many bargaining sessions,when the issue of the future of defined benefitplans is discussed, younger union members oftenasked why they cannot have lump-sum distribu-tions at any time when they leave, as is permittedby so many corporate plans. They also asked,“Wouldn’t we be better off with programs with loanprovisions and hardship withdrawal?” And, as onespeaker said, most of them are not sure that theywill live long enough to collect a full pensionanyway.

It is clear that the dynamic of the workplace is changing. Also at issue is a change over thelast 20 years in the environment in which wefunction. Twenty years ago, shortly into implemen-tation of the Employee Retirement Income SecurityAct of 1974 (ERISA), the focus was frequently onprotecting those who were forced to retire. Even 10years ago, the front pages focused on downsizing,reengineering, and early outs. The emphasis wasnot on the challenge of hiring people but on thechallenge of getting rid of people.

Today, The Washington Post, CommerceClearinghouse, and the Society of Human ResourceManagement surveys underline that the biggerchallenge is finding individuals to fill positions. Forexample, included in my renewal statement froman insurance carrier for my life insurance premiumwas a little flyer. It offered me, as a policyholder, abonus if I could suggest to them someone whomight end up working for them, as they werehaving difficulty recruiting group sales personnel.It also asked if I could provide them with thenames of five individuals they might interview orindividuals who I knew were in line to graduatefrom college. Earlier, on entering a coffee shop, Iwas surrounded by signs saying, “Help wanted, jobsavailable, good benefits, health and 401(k)

1 See Dallas L. Salisbury, Ed., Tax Reform: Implica-tions for Economic Security and Employee Benefits(Washington, DC: Employee Benefit Research Institute,1997).


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provided.” And this organization employs mostly apart-time work force.

These incidents point to the growingusefulness of benefits for recruitment purposes, ifthey fit the needs of the individual being recruited.As recruitment tools, benefits such as pensionplans are increasingly of a slightly different naturethan the traditional plans of 25 years ago, which,with the exception of large enterprises like Procterand Gamble, were primarily defined benefit plansin large enterprises, as opposed to defined contribu-tion plans. They had long vesting periods and paidlife annuities. They frequently were purposely usedas “golden handcuffs” in mid-career, and then asproviders of early-out incentives for long-serviceworkers. They were, in short, tools of retention andexit management, not recruitment. Today, thedefined contribution plans and new individualaccount defined benefit plans are primarily recruit-ment tools. They emphasize wealth accumulation,not retirement security.

Finally, we must consider the effect ofinternational competitive issues. The “neweconomy” has focused firms on survival. No longerare benefit plans designed against the backdrop ofassumed profitability and enterprise continuation.Job entitlement has been replaced by performancemeasurement.

The first flexible benefits program at TRWpreceded the enactment of the Revenue Act of 1978and the implementation of the first 401(k) regula-tions in the early 1980s. Literature of 1975, 1976,and 1977 indicates that even before the publicpolicy changes, a fundamental discussion wastaking place concerning the appropriate role ofemployer decision making, of employee choice, andof paternalism. These discussions accelerate aseach new merger is announced and as corporationsin trouble go “outside” for CEOs unburdened by the

organizations’ past and traditions.Christopher Conte provides an introduction

for this volume that distills the results of aDecember 1997 policy forum sponsored by theEBRI Education and Research Fund. He tightlyweaves the story of why employee benefits fill vitalneeds, while making clear that objectives havechanged.

The chapters that follow add body to thedynamic of change, along with valuable insights onwhy change will continue. The individual authorsprovide a glimpse into the thought processesbehind employee benefit programs’ changingobjectives and discuss where the future is likely totake us.

I thank the sponsors of the EmployeeBenefit Research Institute for making this forumand book possible, while making it clear that anyopinions, errors, or positions taken are those of theauthors and not of EBRI, EBRI-ERF, its staff,Members, Trustees, or editors.

I want to thank Pamela Ostuw and JackVanDerhei for organizing the forum; CindyO’Connor for production of forum materials and thebook; Maureen Richmond, Lynn Miller, andDeborah Holmes for copy editing; and all of theforum authors and participants.

EBRI was founded in 1978 by leaders inthe employee benefits field with a vision of buildingan objective research and education organization.Its mission is to contribute to, to encourage, and toenhance the development of sound employeebenefits programs and sound public policy throughobjective research and education.

This volume carries forward that mission ofproviding a basis for sound program design. It isdedicated to the founders of EBRI, in this ourTwentieth Anniversary year.

Dallas L. SalisburyMay 1998

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About the AuthorsRonald Blackwell is Director of Corporate Affairsof the AFL-CIO, a new department charged withsupporting unions in their strategic relations withemployers at levels ranging from capital steward-ship and corporate governance, to organizing andcollective bargaining, to work place democracy andtechnological change. Before coming to the AFL-CIO, Blackwell was executive assistant to thepresident of the Amalgamated Clothing and TextileWorkers Union (ACTWU) and chief economist ofUNITE, where he advised union leadership onpublic policy and union strategy. Before joining inthe labor movement, he was an academic dean inthe Seminar College of the New School for SocialResearch in New York, where he taught economics.He is author of “Globalization and the AmericanLabor Movement” in a book edited this year bySteve Fraser and Joshua Freeman, AudaciousDemocracy: Labor, Intellectuals and the SocialReconstruction of America. He was also co-editor ofWorldly Philosophy: Essays in Political and Histori-cal Economics, a festschrift for Robert Heilbroner.

Francis N. Bonsignore is Senior Vice President-Human Resources and Administration with Marsh& McLennan Companies, Inc. Prior to joiningMarsh & McLennan Companies, he was a partnerand National Director, Human Resources withPrice Waterhouse. Bonsignore was formerly apartner with Booz, Allen & Hamilton, the manage-ment consulting firm. With Booz, Allen, Bonsignoreserved both in a client service role—focusing onorganization and human resources managementissues—and as Vice President, Corporate Person-nel. He was with Booz, Allen from 1972 and apartner from 1978 until joining Price Waterhousein 1986. He joined Marsh & McLennan Companies,Inc., in 1990. Bonsignore received his B.S. degreefrom Cornell University in 1968 and the M.P.A.degree from the Johnson Graduate School ofManagement at Cornell in 1971. He has written onnumerous management and human resourcestopics and has also spoken widely before profes-sional audiences on the challenges associated with

the management of professional services organiza-tions.

Christopher R. Conte is a freelance writer basedin the Washington, DC, area. An EBRI fellow since1995, he has written on a wide range of socialpolicy issues, including Social Security, Medicare,and welfare reform, for such publications asGoverning Magazine, Congressional Quarterly, andthe AARP Bulletin. He also has reported exten-sively on telecommunications policy and the socialimplications of new information technologies for theBenton Foundation. In addition, he has writtenmajor articles about journalism. From 1979 to1995, Mr. Conte worked in the Washington bureauof the Wall Street Journal, where he coveredeconomic policy, banking, and transportation, andedited both foreign and domestic policy coverage.He also wrote the Washington Wire, a weeklycolumn on government and politics, and the LaborLetter, a column on labor and work place issues.Earlier, he worked as a reporter for the Congres-sional Quarterly and the Rutland Herald in Ver-mont. He holds a B.A. from Harvard.

Dale L. Gifford is the Chief Executive of HewittAssociates LLC. He joined the firm in 1972 as anactuary after graduating with honors from theUniversity of Wisconsin. Prior to becoming ChiefExecutive, Gifford assisted in the management ofthe firm’s actuarial practice, led their flexiblecompensation practice, managed the Southwestand Midwest regions, managed Hewitt Associates’international operations, and served on the Execu-tive Committee. He is a Fellow of the Society ofActuaries and has been a principal of the firm since1976.

James B. King, director of the U.S. Office ofPersonnel Management, has been involved inpolicymaking and administration in local, state,and national government and at major universitiesfor more than 25 years. King was born in Ludlow,MA, graduated from American International


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College in Springfield, MA, and early in his careertaught school and worked in community action. In1977, he left his position as a director of theMassachusetts Bay Transportation Authority toenter the White House as a Special Assistant toPresident Carter for Presidential Personnel. InOctober 1977, he was appointed to the NationalTransportation Safety Board and later became itschair, a post he held until January 1982. Kingreturned to Massachusetts to be an Associate VicePresident at Harvard University and later becamea Senior Vice President at Northeastern Universityin Boston. He has been a senior advisor to SenatorsEdward Kennedy (D-MA) and John Kerry (D-MA).He is a graduate of the Harvard School of BusinessAdministration’s program for senior governmentmanagers, is a fellow of Harvard’s Institute ofPolitics, and has been president of the Massachu-setts Cultural Alliance. He is a past commander ofDisabled American Veterans, Chapter 94, Ludlow,MA. King’s nomination by President Clinton toserve as the government’s top personnel officer wasconfirmed by the Senate on April 2, 1993. Inaddition to serving as OPM Director, King has beenchairman of the National Partnership Council, amember of the President’s Management Council,and a member of the President’s Commission onWhite House Fellows.

James A. Klein is President of the Association ofPrivate Pension and Welfare Plans (APPWP). TheAPPWP is a Washington, DC, based associationrepresenting the broadest reach of the privateemployee benefits system: company sponsors ofemployee benefits, plan providers, and benefitsprofessionals. Previously, Klein served as theDeputy Executive Director of the Association. Priorto joining the APPWP, he served as Manager ofPension and Health Care Policy for the U.S.Chamber of Commerce, and before that was anassociate in a Washington, DC, law firm specializ-ing in employee benefits. Klein has also served as alegislative assistant for Congressman John J.LaFalce (D-NY). He graduated magna cum laudefrom Tufts University with a degree in Bioethicsand graduated with honors from the National LawCenter—George Washington University. He is amember of the District of Columbia bar. He serveson the editorial board of Managing EmployeeHealth Benefits and as an advisor to BenefitsCouncil of the American Compensation Association.

Michael R. Losey, SPHR, CAE, President andCEO of the Society for Human Resource Manage-ment (SHRM), has more than 35 years experiencein all areas of human resource management. Beforebeing named to the Society’s top position in 1990,Losey served more than 28 years in managementand executive level positions with two Fortune 50organizations. Losey has been active in interna-tional human resources and currently serves atPresident of the North American Human ResourcesManagement Association and is Secretary Generalof the World Federation of Personnel ManagementAssociations, which links human resources profes-sional organizations around the world. In additionto serving on the SHRM Board of Directors andboards of the Human Resource CertificationInstitute and the SHRM Foundation, he is a Fellowand director of the National Academy of HumanResources. He holds both Bachelor’s and Master’sdegrees of business administration in industrialrelations from the University of Michigan, is acertified Senior Professional in Human Resources(SPHR), and Certified Association Executive (CAE).Losey is a frequent speaker and spokesperson onhuman resource management issues to the SHRMmembership, international groups, organizations,media, and Congress.

Congressman Earl Pomeroy, recently elected tohis third term in the U.S. House of Representa-tives, sits on the House Budget and AgricultureCommittees and is a member of the House Demo-cratic Leadership Caucus. Pomeroy has emerged asa substantive force on issues ranging from farmpolicy to overhauling the nation’s retirementsystem, and he has built a reputation as a hard-working, reform-minded lawmaker who believes inapplying North Dakota values and common senseto the problems facing our nation. He is a leadingcongressional expert on the topic of pension andretirement savings reform. In late 1995, he co-founded a bipartisan, bicameral steering committeeon retirement issues, which hosted a series of policyseminars during the 104th Congress. Pomeroyearned his Bachelor of Arts degree in politicalscience from the University of North Dakota in1974 and his law degree from UND in 1979. Heundertook graduate research in legal history at theUniversity of Durham in England. Upon gradua-tion, Pomeroy returned to his hometown andpracticed law for five years. He was elected to the

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State Legislature in 1980 and elected StateInsurance Commissioner in 1984. He served asPresident of the National Association of InsuranceCommissioners in 1990.

Robert D. Reischauer is a Senior Fellow at theBrookings Institution. From March 1989 untilMarch 1995, he served as the director of theCongressional Budget Office (CBO). He had helpedAlice Rivlin, CBO’s first director, set up the office in1975 and served as the Assistant Director forHuman Resources and Community Developmentand later as the Deputy Director. In 1981,Reischauer left CBO to become the Senior VicePresident of the Urban Institute. In 1986, he joinedthe Economic Studies Program of the BrookingsInstitution as a Senior Fellow, a position that heleft when he was named CBO’s third director.Reischauer is an economist who has writtenextensively on federal budget policy, Congress,health and social welfare issues, poverty, and stateand local fiscal problems. He has an undergraduatedegree from Harvard College and a master’s degreein international relations and a Ph.D. in economicsfrom Columbia University.

Dallas L. Salisbury is President and CEO of theEmployee Benefit Research Institute (EBRI),Washington, DC. He is also Chairman and CEO ofthe American Savings Education Council (ASEC), apartnership of public- and private-sector institu-tions that undertakes initiatives to raise publicawareness about what is needed to ensure long-term personal financial independence. He iscurrently a member of the Board of Directors of theNational Academy of Social Insurance, the Board ofDirectors of the Health Project, and the AdvisoryBoard of the National Academy on Aging. He serveson many editorial advisory boards, including thoseof Employee Benefit News, Benefits Quarterly,Employee Benefits Journal, and Healthplan: TheMagazine of Trends, Insights and Best Practices.Salisbury has served on the Secretary of Labor’sERISA Advisory Council, the presidentially ap-pointed PBGC Advisory Committee, as a consultantto numerous government agencies and privateorganizations, and on committees of many profes-sional organizations. He is a Fellow of the NationalAcademy of Human Resources. He has written andlectured extensively on economic security topics. Heholds a B.A. degree in finance from the University

of Washington and an M.B.A. in public policy andadministration from the Maxwell School at Syra-cuse University.

David M. Strauss is Executive Director of thePension Benefit Guaranty Corporation (PBGC), aself-financing government corporation that providesinsurance for defined benefit pension plans nation-wide. PBGC administers two insurance programscovering more than 42 million workers in about50,000 plans. As Executive Director, Strauss isresponsible for the Corporation’s operations thatinvolve premium revenues of about $1 billion,assets of about $12.5 billion, benefit payments ofnearly $800 million, and benefit obligations to morethan 440,000 workers and retirees in nearly2,400 pension plans. Strauss comes to PBGC withextensive management and policy experience. Hebrings special understanding of issues important toworkers and retirees. He served for nearly fouryears as Deputy Chief of Staff to Vice President AlGore, and for 13 years in senior managementpositions in the U.S. Senate. He was Staff Directorto the Senate Committee on Environmental andPublic Works and Chief of Staff to Senator JohnBreaux (D-LA) and the late Senator Quentin N.Burdick (D-ND). In these positions, he advised on abroad range of economic and domestic policy issues,including wage and work place protection, retire-ment security, health care, welfare, and trade.

Charles G. Tharp has been Senior VicePresident-Human Resources for Bristol-MyersSquibb Company since January 1993. He is amember of the Management Committee and isactive in the strategic management of the company,which he joined in 1987 as Director, Compensationand Benefits. In 1990, Tharp was promoted to VicePresident, Compensation and Human ResourceDevelopment. Before joining Bristol-Myers Squibb,Tharp was an executive compensation consultantwith the international compensation and benefitsconsulting firm TPF&C. Prior to that, he heldhuman resources positions at PepsiCo, Pillsbury,and General Electric. He holds a Ph.D. in Labor andIndustrial Relations from Michigan State Univer-sity and an M.A. in Economics from Wayne StateUniversity. He received his undergraduate degreein business administration and economics fromHope College in Holland, Michigan.

1

Executive Summary

Introduction: Do Employers/Employees StillNeed Employee Benefits?by Christopher R. Conte

■ IntroductionJust when employment-based benefits have becomean accepted part of the economic landscape, theircontinuation as a key feature of the employmentscene and source of financial security for Americanfamilies is being questioned.

That isn’t to say employee benefits areabout to disappear any time soon. As Michael R.Losey, president and chief executive of the Societyfor Human Resource Management, notes, benefitshave become such a standard—and substantial—part of the employment relationship that the word“benefits” rarely comes with the modifier “fringe”attached any more. And Francis N. Bonsignore,senior vice president of Marsh & McLennanCompanies, Inc., observes that for “mainstream”employers—those who have been around awhileand employ a significant number of people—corebenefits, at least, have come to be seen as a “priceof entry,” a “source of legitimacy” in the Americaneconomy.

But there are signs of change. Employers,facing tough international competition, are ques-tioning the value of benefit programs. Concernedabout high costs, many are shifting at least some ofthe financial burden and risk associated withretirement and medical benefits to employees, andothers—especially small and relatively new firms,which account for most job growth—are offeringrelatively few benefits.

Work forces, meanwhile, are becomingincreasingly diverse and individualistic, stretchingthe capacity of employers to design programs thatsatisfy widely varied employee needs. And tax andregulatory changes have taken away some of theadvantages of employment-based programs whileencouraging the growth of alternative sources ofbenefits outside of the job context.

Clearly, it’s a good time to go back to thebasics. Employers have good reason to consider thequestion, notes Rep. Earl Pomeroy (D-ND). To theextent employers withdraw from the benefitsarena, the lawmaker writes, pressures will grow forgovernment intervention. And that, he warns,would be no bargain for employers, who would stillhave to pay much of the cost of benefits (either innew taxes or regulatory costs), but would end upwith considerably less flexibility to shape benefitprograms in ways that might support their busi-ness goals. When it comes to benefits, concludesPomeroy, employers face a “pay-me-now or pay-me-later” proposition.

■ Forces of ChangeWhy are employment-based benefit programsunder stress in the late 1990s, when the U.S.economy is showing unprecedented strength,corporate profits are high, and the government hasset relatively modest goals for itself? According toBrookings Institution Senior Fellow RobertReischauer, a number of forces are contributing tothe “slow but steady” reduction in the importance ofemployment-based benefit plans.

For one thing, an employment-basedsystem works best, notes Reischauer, if the workforce is relatively homogenous. Employees are morelikely to support a benefits program if they all needroughly the same benefits and if benefit costs arefairly equal for all workers. But today’s employeescome from a wider range of family backgrounds(single or divorced, with or without children, aloneor with aging parents or grandparents). They alsohave a greater diversity of needs (some work parttime and some full time, for instance, and someneed basic benefits, while others already get thesebenefits through spouses). As these differencesbecome more apparent, some workers begin to


2

object to benefits they believe help otheremployees disproportionately. Support for stan-dardized benefit programs erodes accordingly,Reischauer says.

One response to this problem, of course,has been to give individual workers more freedomto choose among benefits—for instance, by selectingtheir own customized array of benefits from cafete-ria plans. But that can have a corrosive effect too,undermining employment-based benefits as aneffective tool for pooling risk.

Changes in public policy, meanwhile, havediminished the economic advantages of employ-ment-based benefits, Reischauer notes. Corporateincome tax rates have declined, cutting the value oftax deductions for employer benefits. As the valueof the tax subsidy drops, employers have found itmore difficult to offer benefits at a lower cost thanmight be available elsewhere. At the same time,new tax preferences—most notably, tax deductionsfor individual retirement account (IRA) contribu-tions—have helped create alternatives to employ-ment-based benefits.

There’s more. In the not-too-distant past,employers could provide benefits more efficientlythan others because of the economies associatedwith centralized administration and bulk purchas-ing. But now, mutual funds and health-purchasingcooperatives, among others, can achieve compa-rable efficiencies for individuals outside of theemployment context.

While concluding that employment-basedbenefits will become less prevalent and less gener-ous in the years ahead, Reischauer predicts thatthe change won’t occur abruptly. “Over the next fewdecades,” he writes, “it’s not going to be a rapidavalanche. It’s going to be like the melting of aglacier when the environment warms up.”

■ Rising Costs, Tighter ControlsEBRI’s examination of the role of employment-based benefits comes against a backdrop of anincreasingly competitive global economy. “We livein a much more unforgiving world,” Marsh &McLennan’s Bonsignore observes. “Twenty or30 years ago, a public company might be able to getover a bad year. Today, with the scrutiny that isgiven by investors and shareholder groups, a badyear may in fact prove to be your last year.” In thisenvironment, managers feel more pressure to

justify all their costs—including the cost of benefits.“Benefits are a big cost of doing business, and as abig cost, the shareholders and the CEOs are goingto say, ‘What am I getting for my money, what’s thereturn on my investment?’ ” notes the Society forHuman Resource Management’s Losey. In light ofsuch pressures, benefit costs “must be managed,controlled, and (they must) get a return,” he says.

Unfortunately, it’s difficult to show muchreturn on “core benefits” such as retirement plansand medical coverage. Many employers see themprimarily “as an encumbrance with little or noupside,” Bonsignore notes; these benefits are verycostly, and, perhaps because they are consideredalmost a given in many work places, employerscan’t use them effectively to motivate workers orincrease productivity, he argues. That may notmean employers are about to eliminate corebenefits—at least “at this point”—but it doessuggest that the extent of employers’ responsibilityto provide them is “up for debate,” Bonsignore says.When companies feel pressure to show higherearnings, cutting benefits (or not offering them inthe first place), trimming the number of employeescovered, or shifting more of the financial burden ofpaying for benefits to employees are definitelyoptions.

Employers are more enthusiastic about“new age,” or “lifestyle,” benefits such as employeeassistance plans, dependent care, flexible time, andother family-friendly programs, according toBonsignore. Many employees want these benefits—a point underscored by James King, immediatepast director of the Federal Office of PersonnelManagement, who notes that the Family andMedical Leave Act requiring employers to giveemployees unpaid leave to deal with family emer-gencies “proved to be one of the most popular”policy moves of President Clinton’s presidency.

Not only are such nontraditional benefitspopular, but employers can provide them at rela-tively low cost, Bonsignore says. And, significantly,many employers believe they get more “leverage”with these benefits compared with traditionalones—that is, offering these benefits, unlikeoffering core benefits, induces improved employeeperformance. While the actual impact of thesebenefits on productivity is hard to measure, theirlow cost makes them almost a no-lose propositionfor employers, he adds.

3

Executive Summary

■ Benefits and EmployeePerformance

Some argue that traditional retirement and healthbenefits have a large role to play in ensuringcorporate success. Charles G. Tharp, senior vicepresident of Bristol-Myers Squibb Co., argues thathigh-performance companies must be able to adjusttheir work forces rapidly as competitive circum-stances change. They also need workers who areindependent self-starters, who take pride in theirwork and view themselves as “partners” with theiremployers rather than as dependents. To nurturethese qualities, Bristol-Myers Squibb has sought tomove away from traditional benefits programs thatbind employees to the company with “goldenhandcuffs” and toward arrangements that encour-age employees to take more responsibility for theirown benefits.

Tharp acknowledges that this transforma-tion, often described as abandoning corporate“paternalism” in favor of employee “empowerment,”was designed in part to reduce benefit costs byrequiring employees to pay more for their ownbenefits. But he says the approach also helped“reinforce and support” the “culture” companiesmust create if they are to survive in today’s com-petitive economy.

Contracting with outside vendors toadminister benefit programs was a key element inthis transformation, according to Tharp. Withoutsourcing, he says, management not only savedmoney. It also redefined its relationship to employ-ees, transforming itself from being the provider ofbenefits to being the mechanism through whichemployees “get access to different networks and anability to take care of their own needs.” Cancompanies really reduce their contributions tobenefit programs and, at the same time, motivateemployees to become more productive? Tharpsuggests that they can. With careful design, hesays, benefit restructuring can produce a “win-win”situation for management and employees. WhenBristol-Myers Squibb decided to hire an outsidevendor to administer its benefit programs, forinstance, it contracted with a company that alsooffered employees a wide range of new investmentoptions in company capital-accumulation plans. Asa result, even as the company was able to trim$2.5 million from the $6 million cost of administer-

ing benefits, employees hailed the change as “ourmost major benefit improvement,” Tharp says.

Employees haven’t always reacted soenthusiastically to such changes, however. Ifemployers aren’t careful, empowerment can soundto many employees like “the haves” turning to the“have nots,” and saying, “Congratulations, you’reon your own...you have less, but that’s good newsfor you even if you don’t believe it,” notes HowardFluhr, president and chief executive of the SegalCompany.

Even where employees may not be embit-tered, they can be overwhelmed by the decisionsthat empowerment requires them to make forthemselves. “Empowerment is a great managementword, but it’s a terrifying word to employees,” saysone participant. Most employees don’t want to be“empowered,” he says. Rather, they want to bepresented fairly simple choices and to know thatthese choices will meet their needs.

■ Meeting Employee NeedsBut what are those needs—and what role dobenefits play in meeting them? Several participantssuggests that benefits rank relatively low in mostemployees’ hierarchy of needs. When the Society forHuman Resource Management asked companieswhat poses the greatest threat to their ability toretain employees, for instance, benefits rankedseventh—behind higher wages being offeredelsewhere, dissatisfaction with potential careerdevelopment, a feeling of not being appreciated,difficulties balancing work and life, job burn-out,and conflicts with supervisors and coworkers.

This understates the real value of benefitsto American families, argues Ron Blackwell,director of corporate affairs for the AFL-CIO.According to Blackwell, benefits are the secondmost important concern of working people today,ranking behind job security and ahead of wages.Blackwell stresses, however, that good benefitprograms also have an important role to play inensuring that companies thrive. “The high road tocompetitive success must focus on product qualityand customer service first, and must meet thecompetition through increased productivity, whichrequires employee commitment,” he notes.

According to Blackwell, working familieslook to benefits not only for economic security, but


4

also for tangible proof of how committed theiremployers are to them. When working people—andtheir unions—see such evidence of employercommitment, their behavior will change in positiveways, he suggests. Labor recognizes that it mustfind “new ways to engage employers, new ways tohelp businesses become successful, new ways todeliver income to our workers,” Blackwell says.“But we’re not going to give up our old waysunless...we see a commitment on the employer’sside first and foremost.” Several managementrepresentatives agreed that benefits programs playa key role in demonstrating how responsive em-ployers are to employees. But, argues Marsh &McLennan’s Bonsignore, the “new and improvedmodel” for benefits will include such features aschoice, customization, and portability—all traitsthat enhance employee well-being in today’s morecompetitive and rapidly changing economic envi-ronment.

Dale L. Gifford, chief executive of HewittAssociates, writes that under the new paradigm,employers must be careful to define clearly theirresponsibilities as well as those of employees, tooffer “understandable” plans, to provide employeeswith the tools to make decisions for themselves,and to serve as “expert buyer” and “quality assurer”for employees. “There are no easy answers,” Giffordsays. Employers must “let go of the ‘old deal,’ ” butthey must do so “in a smart way, a kind way,” andat the “appropriate speed.”

A smart, kind approach includes respond-ing to the growing need among employees foreducation about how they can best achieve theirgoals in a less paternalistic environment, manyforum participants agreed. “The more flexibilityyou introduce, the more choice you introduce, themore demand you have for advice and guidance,”notes John McCormack, executive vice president ofTIAA-CREF.

Employers have devoted considerableresources to education programs, and some newtools are emerging. Jeffrey Johnston, president ofDecision Innovations, Inc., for instance, describes anew software tool his company has designed thatwill enable employees to sort out their own priori-ties and then compare rival health plans accordingto some 400 different attributes.

But unresolved questions remain. Employ-ers worry about being held responsible for bad

employee decisions. “The real issue,” one partici-pant says, “is risk...who bears the risk of a poorchoice.” He argues that employers and employeesmust share responsibility: Employers shouldprovide a “reasonable ground” of security—perhapsby selecting sound alternatives for employees—andemployees, in turn, must make “reasonablechoices.”

■ Policy ImplicationsStill, it’s all but certain that in a world of increasedchoice, some employees won’t make the bestdecisions. “There is a very wide range of capabili-ties (among employees) of understanding what thechoices are and what the needs are,” says SegalCompany’s president and chief executive, HowardFluhr. He argues that employers must be careful tomeet the needs of the “rank and file,” the “hoipolloi,” for some core of information they really canuse to make sound decisions. If too many employeesfail to achieve financial security in retirement orare devastated by inadequate medical coverage, thegovernment is sure to step in to try to fix theproblem, Fluhr warns.

There are three possible types of govern-ment response to the erosion of the employment-based benefit system, according to the BrookingsInstitution’s Reischauer: to collectivize benefits ona national scale; to try to shore up current ap-proaches through a combination of rhetoric, taxincentives, or regulatory relief; or to patch togetherprograms designed to rescue groups that fallthrough the cracks of the current system.

Reischauer says he sees “virtually nochance” for at least the next couple of decades thatbenefits will be nationalized. He also doesn’t holdout much hope that efforts to shore up the existingsystem will bear much fruit. That isn’t for lack oftrying: David Strauss, executive director of thePension Benefit Guaranty Corporation, describesefforts by his agency and other federal departmentsto ease administrative and regulatory burdens onpension plans and to encourage wider use ofdefined benefit plans.

If Reischauer is correct that such effortsare unlikely to reverse current trends, that leavesonly his third set of policy responses—trying topatch cracks in the current system as they appear.This approach, too, is already being pursued;

5

Executive Summary

Reischauer cites various health-care programsaimed at helping low-income children whosefamilies lack insurance and the recent expansion ofIRAs.

But these efforts could be self-defeating inthe long run, according to Reischauer. The more thegovernment creates alternative sources of benefitsoutside of the employment setting, the less employ-ers and employees will see a need for such pro-grams in the work place. As a result, despite thegovernment’s good intentions, these efforts “prob-ably will only make the problem a little bit worse,”Reischauer predicts.

“The most likely course is that we’ll muddlealong,” he concludes. “Economic and social forceswill continue to erode the rationales for employ-ment-benefits, (and) there will be a very slowerosion of the fraction of the work force that enjoysthese benefits.”

■ Getting to YesThe best hope for halting or reversing this trend,several forum speakers agrees, will be for bothgovernment and employers to recognize that thecurrent system has substantial advantages.

“What does the future hold?” asks Rep.Pomeroy. “It depends on corporate America under-standing that, in the end, good corporate policyruns concomitant with good public policy, (and on)Congress understanding that the private adminis-tration of benefits is a system that is working (andthat it) is far and away the most cost-effective wayto continue to provide the most good for the mostpeople.”

The congressman notes that the “politicalbargain” that led to the current system—in whichemployers agreed to provide benefits and govern-ment, in turn, lets them do so in a “fairly deregu-lated environment”—is now being challenged bymembers of both political parties. On the right,many Republicans would eliminate tax preferencesin order to simplify the tax code, while on the left,many Democrats favor regulation or new programsto make up for deficiencies they see in employment-

based arrangements for retirement and healthcare.

Acknowledging such political pressures,James A. Klein, president of the Association ofPrivate Pension and Welfare Plans, says advocatesof the current system must do a better job ofdemonstrating to Congress that employer involve-ment still brings substantial social advantagescompared with a completely individualized system.The advantages are different than they were 20 or30 years ago. In today’s economy, Klein says, theadvantages revolve less around the financialsavings to the government and beneficiaries, andmore around what employers do to improve thequality of benefits and to educate individuals to bewiser consumers.

“The greatest value of the employmentsystem is the extent to which it helps individualsbe more prudent purchasers and consumers ofbenefits,” he says. That point currently “is com-pletely lost on most of the policymakers in Con-gress,” he adds.

In the end, employers and employees alikeshare an interest in a strong system of employeebenefits, concludes EBRI President Dallas L.Salisbury. We need strong institutions to continueproducing jobs, he notes. But the success of institu-tions, in turn, depends heavily on employees’productivity. And that is shaped in part by thecommitment employers show to them through cashcompensation and benefits.

Current circumstances—especially theincreased diversity of the work force—make benefitprograms particularly hard to design, Salisburyacknowledges. But for at least the next 17 or18 years, when projections suggest labor marketswill be tight and employers will face challengesattracting and keeping quality employees, well-designed benefit programs will continue to be animportant element in employer-employee relations,he predicts.

“The bottom line,” says Salisbury, is thatemployers and employees both will need “thought-ful innovation” and “continued education.”

7

Chapter 1

1Employee Benefits: Here Today, HereTomorrowby Michael R. Losey

■ IntroductionDo employers and employees still need employeebenefits? As a human resource managementexecutive, I can say YES, employers and employeesstill need employee benefits. But as the head of aprofessional association that monitors and seeks toshape legislation and regulation affecting the workplace, I can also say that, like so many otherthings, we can expect change.

Employers still need employee benefits.Employee benefits are a significant component oftotal compensation and offer employers addedflexibility in compensation design. Small start-upfirms, for example, may not have the resources tooffer competitive salaries and may instead useemployee benefits, such as stock options, flexiblebenefits, and adaptive work schedules to lureemployees. On the opposite end of the spectrum,companies in bankruptcy protection may be con-structively prohibited from raising wages and mayneed to ensure they are getting the most out oftheir current benefits investments, to encourageemployees to stay on. At all points in between,employers use employee benefits to create anappropriate balance of wage and nonwage compen-sation.

Most importantly from an employer perspec-tive, well-designed employee benefits are a centralstrategy in attracting and retaining employees,especially in a competitive labor market.

■ Core Benefit PackagesToday’s work force has come to expect at least acore benefit package—health care, pension, andpaid leave (sick days, holidays, vacation, etc.)—andemployers who do not offer benefits are likely to beat a decided disadvantage in attracting qualifiedemployees. In fact, many employees, especially

employees whose skills and experience place themin high demand, simply will not consider a job thatdoes not include reasonable benefits levels.

As we know, attracting new employees isconsiderably more expensive than retainingexisting employees, and employee benefits are stillan element in employee-retention strategies. Arecent survey done by the Society for HumanResource Management (SHRM) finds that em-ployee benefits such as health care, 401(k) plans,flexible work schedules, and training and careerdevelopment are among the most effective strate-gies for retaining employees. But only in rare casesis an employee really restrained from leaving anemployer simply because the employer’s benefitspackage is so good (e.g., postretirement medicalinsurance, child care or tuition assistance, generousvacation policies, 401(k) contributions, vestingrequirements for pensions, stock options, etc.).

That said, it is unlikely that benefits inthemselves are now or will be sufficient to retainemployees. The SHRM survey, for example, findsthat higher salaries elsewhere and dissatisfactionwith potential career development at an organiza-tion are the two most significant threats to em-ployee retention. Only 11 percent of respondentsbelieve that “better benefits offered by otherorganizations” pose a major threat to their em-ployee retention. This is complicated by the age-oldproblem of most employees not fully understandingtheir benefits anyway.

But, employees need employee benefits. Forsome employees, employment-based benefits aretheir only option for obtaining health care, lifeinsurance, or retirement income. Many moreemployees have come to rely on employment-basedbenefits to finance medical and dental care, retire-ment, training and professional development,dependent care, periods of nonwork (e.g., holidays

8


and vacation, sick and disability leave), and a hostof other needs. In fact, some of the most popularbenefits over the last few years have been thosethat help employees make the most of their time,including flexible schedules, compressed workweeks, and work at home options.

Beyond what employees need, what they wantseems to be endless. Employers are under constantpressure to develop new or expanded benefits tomeet the increasingly diverse needs of today’s workforce. Today’s work force, for example, reflects ahigher proportion of single-person households, dualcareer families with children, and families withoutchildren than ever before—with each of theseconstituencies having a different set of needs andinterests vis-a-vis employee benefits.

Unfortunately, many employees neitherrecognize nor understand that employee benefitsare not “free.” Typically, they come at the expenseof higher wages. Between 1973 and 1995, forexample, the real (inflation-adjusted) medianweekly income of full-time wage and salary workersdropped 12.7 percent, according to the U.S. Bureauof Labor Statistics. This statistic and others like ithave been trotted out by unions, policymakers, andothers as evidence of the woeful state of Americanworkers. But what seems to be less widely known,or acknowledged, is that during this same timeperiod, real average hourly compensation actuallyincreased 6.1 percent.

■ Rising CostsThe answer to this seeming paradox, of course, isthe substantial increase in the amount spent onemployee benefits. Some of this increase in benefitscosts is due to higher employer payments forstatutorily required benefits (e.g., Social Security,workers’ compensation, and unemployment insur-ance). The rest is due to increased costs for volun-tarily provided benefits, most notably healthinsurance, which led to most companies redesign-ing their health care plans during the 1980s. Thereis no free lunch. Employers may need to do a betterjob educating employees, and policymakers, aboutthe implicit tradeoffs between wages and benefits.

Even if demand for new or expanded benefitsabates, which is unlikely, I expect we will continueto see greater demand for benefits portability and

flexibility. Ongoing turbulence, or the perception ofturbulence, in job markets will continue to feeddemand for benefits portability as employeesattempt to defy the adage, “You can’t take it withyou.” The growth of 401(k)s and the enactment ofthe Health Insurance Portability and Accountabil-ity Act of 1996 certainly have moved benefitsfurther in this direction. While beneficial foremployees, though, portability threatens to dimin-ish the value of generous benefits as a retentionstrategy.

I expect we will also continue to see greaterdemand, from both employers and employees, forflexible benefits. As employers seek to tailorbenefits packages in such a way as to control costswhile still attracting and retaining individualemployees, human resource departments will needto respond with greater flexibility in benefitsdesign. The “one size fits all” benefits strategy isnot particularly effective in an environment inwhich employers need not employees, in theaggregate, but rather specific individuals withspecific skill sets.

In the same vein, as the work force hasbecome more diverse, with employees reflecting abroad variety of demographic and economic situa-tions, there will be greater demand from employeesfor flexible benefits. To truly be a “benefit,” benefitsneed to be customized to meet employees’ indi-vidual, and changing, needs. Health insurancecoverage, for instance, while still de rigueur formost jobs, is simply redundant for many dual-income families who could better benefit by havingone spouse drop health coverage in favor of higherwages or other benefits.

This entire discussion of employer andemployee needs, however, assumes an “all elsebeing equal” environment. Yet there is anotherissue, beyond employer/employee needs, that mayplay a pivotal role in shaping the future of em-ployee benefits by fundamentally altering thisenvironment: U.S. tax policy. Many of the currenttax-reform proposals (e.g., flat tax, consumptiontax) would reduce or eliminate the tax deductibilityof many or all employee benefits, making employeebenefits a much more expensive—perhaps aprohibitively expensive—proposition foremployers.

In 1997, the Employee Benefit Research

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Chapter 1

Institute published a series of papers, written byexperts representing a variety of viewpoints,examining this issue.1 Although the authors do notagree on the extent of the reductions, all agree thatending the tax deductibility of employee benefitswould reduce the availability of those benefits.

Although employers would be free to continueto offer employee benefits under the current taxreform proposals, they would no longer be able todeduct the cost of these benefits as a normalbusiness expense. As a result, at least some em-ployers would likely discontinue their employeebenefits, perhaps offering higher wages in lieu ofbenefits, and making employees again responsiblefor their own health care, retirement savings,training, dependent care, disability insurance, etc.

■ ConclusionPolicymakers should, therefore, tread carefully.Employers and employees are not the only ones

who need employee benefits: Policymakers, too,need employee benefits. In the United States,employment-based benefits are at the very heart ofthe social safety net, serving as most Americans’primary source of health care up until age 65 and ofretirement income thereafter. (Although healthcare and pensions are not the only employeebenefits woven into the social safety net, they aretwo of the most common, most expensive, and, froma public policy perspective, most critical employ-ment-based benefits.)

If employment-based benefits wither,policymakers would eventually find they eitherneed to expand government-provided benefits orsimply resign themselves to the fact that, due toeither ignorance or poor choices, many individualsand families will be worse off. Neither of thesealternatives is terribly palatable—or politicallyviable.

For this reason, I am cautiously optimisticthat although the nature of employee benefits maychange, perhaps dramatically, over the next20 years, we will still have these benefits and theywill still be a key component of human resourcestrategy.

1 See Dallas L. Salisbury, ed., Tax Reform: Implica-tions for Economic Security and Employee Benefits(Washington, DC: Employee Benefit Research Institute,1997).

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Chapter 2

2Do Employers/Employees Still NeedEmployee Benefits? Yes.by Charles G. Tharp

■ IntroductionThe topic “Do employers/employees still needemployee benefits?” is a provocative subject and onethat requires deep and meaningful thought. Myinitial reaction when asked by Dallas Salisbury toaddress this issue was to answer, “Of course, westill need employee benefits.” However, uponfurther reflection, the reasons I get to “yes” are notthe usual ones that immediately come to mindwhen most benefits professionals consider thepurpose of their jobs in an organization (e.g.,providing security for employees, ensuring theiremployer’s competitive position in the marketplace, etc.). Rather, my sense is that benefits arealso needed to address a very different set ofpressures.

The question was posed as to whether em-ployee benefits are still needed by employers toattract and retain workers. My answer to thatquestion is, “No. Benefits alone do not attract andretain employees.” Rather, if an organization has apositive and open climate, a culture of performance,an orientation toward continuous learning and skillupdating, it will very much be able to attract thecaliber of employee needed to compete effectively intoday’s global economy. This is not to say thatcompanies do not have to maintain at least aminimal package of benefits. If expected “core”benefits are not present, a company risks repulsingthose talented individuals it wants. For those ofyou actively involved in the recruiting efforts ofyour companies, I challenge you to think of the lasttime a high-potential candidate based his or heremployment decision on the benefits of the com-pany. The general prevalence of employee benefitsand the migration of these programs to industryaverages have made them much less of a factor inthe individual’s decision-making process. So,

reframing the question, not having benefitsat least at some threshold level will repulse em-ployees, but the mere presence of a more generousbenefits package will not attract and retain employ-ees. The absence of such benefits will send a signalas to how the company feels about its members—perhaps counter to its stated organizationalobjectives—and will be very negatively perceived bypotential employees. So, in truth, benefits do notattract and retain employees but, rather, canrepulse prospective employees or make it harder foremployees to commit to the objectives of theorganization even if they are currently on board.

■ Rapid ChangeThe employee benefits environment is changingrapidly, largely to keep pace with the way compa-nies are changing to accommodate the pressures ofthe business environment. In the past, employersprided themselves on the personal care and ser-vices they were able to provide employees andretirees. Medical claims were often administeredin-house, and individualized, face-to-face counsel-ing was available on any benefits subject. In the1970’s, most companies chose to have their medicalplans administered by third parties; in the 1980’s,many companies moved to having their savingsplan record keeping done by an outside vendor andin the 1990’s, whatever benefits administrationfunctions that were left behind are now beingoutsourced. The direction for benefits is to meet thecompetitive standard in the most cost-effective,least administratively intense way possible.

Historically, long vesting periods for variousforms of benefits, requirements around pre-existingcondition exclusions, and the general absence ofaffordable benefits external to a group plan madeit very difficult for employees to exercise choice


12

vis-a-vis staying with an employer or joining a newcompany. This “golden handcuffs” focus, whencombined with the advantages of the tax code foremployer-provided benefits, served to be a powerfulweight around the legs of employees who wished tochange employers. Many things have changed overthe years, however, and are continuing to change ina way that makes employee benefits less of an issuein employee mobility. The tax code, as we have seenin recent years, is beginning to take employeebenefits “retail” to the extent that the tax-advantaged structure afforded to employers isbeing challenged and those advantages that doexist are being made generally available to self-employed individuals. Besides available tax creditsand deductions, we have seen Super IRAs (indi-vidual retirement accounts), Keogh plans, andmedical savings accounts all getting more supportand attention. In the mid-1980’s, the passage of theConsolidated Omnibus Budget Reconciliation Act of1985 (COBRA) loosened the hold that medicalbenefits had on employees, and in 1997, the HealthInsurance Portability and Accountability Act tookanother step in this direction by addressing thepre-existing exclusion issue. Further, the model ofmedical care in America has moved rapidly towardmanaged care, and health maintenance organiza-tions (HMOs) have become widely accepted as anormal vehicle for the provision of health carebenefits. Many HMOs can be accessed by individu-als who have no employment affiliation, and, infact, the rates individuals are charged may besimilar to those charged an employer based on theHMO’s community rating scheme.

The past pressures and continual threat ofmedical inflation caused employers to dramaticallyreshape their medical programs in an attempt torein in the expense and control the risk. Besidesthe advent of various managed care vehicles andthe development of employer purchasing coalitions,significant “employee cost-sharing” was introducedwhere heretofore the medical coverage had been“employer provided.” Cost-sharing partnerships ofthis sort broke one more link in the chain of the1950’s employee/employer “contract.” Furtherevidence of the negation of the power of benefits toattract and retain employees is evident by a merequestioning of an employee as to who provides thebenefits he or she currently enjoys. Often anemployee will answer Cigna, Aetna, United

HealthCare, Kaiser, or some other third party.While I would like to think there is still recognitionof the financial and administrative link of thosebenefits to the employer, it is clear the connectionhas been weakened in the minds of employees. Theimpact of FAS 106 on cost-sharing for retireemedical plans is also leading to a time whenretirees fortunate enough to have employment-based health care programs may lose much of theirconnection to the employer as well. And now thatHMOs are getting into the Medicare Risk business,the relationship or identification of retirees withthe company is being distanced as the HMO isbecoming viewed as the primary provider ofsecurity for health care needs.

■ Plan ReplacementBeyond the health care area, the retirement incomeschemes that are becoming more and more popularas defined contribution programs or cash balanceretirement plans replace traditional defined benefitprograms are also increasingly weakening theperceived “employer-provided” nature of thesebenefits. The new employee/employer contract ofpartnership, personal accountability, and selfreliance moves us away from traditional definedbenefit, employer-pay-all plans with their focus onencouraging an employee to remain with a singleemployer until “normal retirement age.” As 401(k)sand cash balance plans become increasinglypopular as substitutes for the traditional definedbenefit plan, and provide portability of benefitsafter a very short vesting period, employees will beless financially and psychologically dependent upona single employer for retirement benefits. Just asthey do for health care now, I suspect that in thenear future when many employees are asked wheretheir retirement benefits come from, the answermay reflect identity with a third party such asFidelity, Vanguard, Merrill Lynch, or some otherfund manager with whom they have their self-directed retirement funds invested, as opposed tosaying the pension plan of their employer. Thistrend in retirement benefits mirrors the trend inmedical care where the emphasis has been onprovider flexibility and network affiliation, ratherthan merely on an employer.

Where I do agree with the statement that“benefits” are important for attracting and retain-

13

Chapter 2

ing employees is in the area of lifestyle programsand other practices aimed at reinforcing an identifi-cation with the goals and objectives of the companyand in recognizing and nurturing the diversity ofthe work force of the modern corporation. Some ofthe most valued “benefits” offered by Bristol-MyersSquibb are in the area of equity participation in thecompany—for example, our worldwide all-employeestock option plan called TeamShare and our veryattractive company savings plan, which has acompany stock match. These benefits provide alinkage with the performance and objectives of thecompany and the individual employee’s ability tobuild wealth for the future. Another area thatrepresents an “attractive benefit” is in the flexibil-ity provided by the company in allowing employeesto better balance their home and work life. In theearly 1970’s, we introduced flextime—a verypopular program within the company. Since thattime, we have introduced compressed work weekschedules (9/80 work weeks) and have numerousemployees who telecommute and work at least aportion of the week from their home with comput-ers and modems and others who “share” jobs. Theseare the benefits of the 90’s and beyond that willhelp to retain and attract the caliber of employeeneeded to compete in today’s business environment.

Recognizing that a diverse and high-caliberwork force is the true strength of the organization,we have also been introducing a variety of moreflexible benefits to address the various needs of ouremployees. On-site day care is an area beingstudied for introduction in 1998. Access to medicalcoverage for same-gender domestic partners andproviding such non-traditional benefits as adoptionassistance, long-term care insurance, financialplanning, and fitness centers have helped to makeBristol-Myers Squibb a more attractive place towork without relying on the enrichment of tradi-tional employer-provided benefits.

As with any human resource intervention, thekey to effectiveness is to align the interests of theemployee with the long-term interests of thecompany and make sure that the various compen-sation and benefit programs are supportive of andconsistent with the culture the company wishes toestablish. Our company has established a high-performance work culture (which we call ourDynamic Operating Culture) characterized byteamwork, participatory decision-making, indi-vidual accountability, continuous learning, andpersonal growth. Corresponding to the new culture,training, development, and overall skill updatingrank among the most desired benefits the companyhas to offer.

Companies are placing greater emphasis onindividual performance and helping employeesbecome more “employable.” While income securityis an issue, it is increasingly being recognized thatlong-term security can best be achieved throughpersonal development and professional growth.Ironically, the presence of high-cost “1950’s, one-size-fits-all benefits” may, in fact, be a precursor tojob insecurity as cost-cutting measures may benecessary for an organization to carry this heavyburden.

■ ConclusionIn summary, the question of “Do employers/employ-ees still need employee benefits?” is very easy tocast in a positive and resounding “Yes!” How onegets to “yes” is different today than it has been inthe past and it will be increasingly different in thefuture. Benefits that recognize and accommodatethe diverse needs of the work force, reinforce theoperating culture, and foster high performance andprofessional growth are the key to attracting andretaining top talent.

15

Chapter 3

3The New Deal: Employee Responsibilitiesby Dale L. Gifford

■ IntroductionIt is an onerous responsibility to try to representthe perspective, as well as discuss theresponsibility, of all employers—large, small,public, and private. Instead, from the perspective ofHewitt Associates as an employer, I would like todraw some observations in terms of what weencounter working with our clients that is similarto my role in senior management in a midsizedorganization that is working through technologychanges, globalization, and a changing work force.I do not pretend to speak for all U.S. employers orfrom a global perspective. My focus is to zero in,from the perspective of employee benefits, onwhat we see as the employers’ responsibility toour employees, or, as we refer to them, as ourassociates.

Our business presents a couple of wrinkles.To some degree, some of our clients and certainlyour associates expect us to be a wonderful rolemodel in everything we do. We are expected to havethe biggest, the best, the newest, and the mostflexible benefits. We actually never live up to thoseexpectations on a consistent basis because they areunrealistic.

■ The Volunteer OrganizationWhen I meet with our associates, I often refer toHewitt Associates as being a volunteer organiza-tion. I quickly clarify that this does not mean weare not paid for what we do, like a lot of othervolunteer organizations. We are a volunteerorganization in that every day our people con-sciously make a decision that they are going towork for us. I also try to reinforce this concept inour recruiting strategy. Our goal is not to findpeople who cannot get employed elsewhere. Wewant people who have choices and elect to workfor us.

Increasingly, many organizations arefinding that in similar ways, they also are volun-teer organizations. In many industries, we live in adifferent environment than 5 or 10 years ago, andthat has different implications for the way we viewemployee benefits, as well as other aspects of thenew employment deal.

There has been much written about thenew employment deal, this new arrangement wehave with employees, and whether it is movingfrom paternalism to greater choice, or a number ofdifferent characterizations of that transition. Werecognize that in all aspects of our business, weneed to be an attractive employer. We want to be anemployer of choice because we realize that wecannot get people simply because they believe theyhave to work with us because they cannot workelsewhere, and we cannot simply pay people more.A number of aspects have to be in place to make usan attractive employer as part of this overall deal.

In terms of changing technology, our needsare changing not only in the technological aspect ofthe work that we do as a business but also in thetechnology required to translate the individualinformation in databases into more companywideknowledge, or intellectual capital. So technology iscoming at you from a number of differentdirections. Then, there certainly are a lot ofdemographic changes relative to 10 or 20 years ago,including some of the diversity aspects and some ofthe globalization aspects of what we are seeking inour people as we move forward.

These demographic changes generatedifferent needs as well as wants or desires. In manyways, the desires of employees are at least asimportant as their needs. As one policy forumparticipant said, most of us actually make decisionson buying houses, buying cars, driving not only atnight but in the rain or snow. We make a lot ofdecisions on our own, and many of them are driven


16

partially by our needs, but a lot of them are drivenby our desires. And the same is true for ourassociates, ouremployees.

It also is increasingly difficult to define ourcompetition. This certainly is true in the broadindustry in which some of us as consultants orservice providers are involved, but it also is true formany of the industries represented here. There issuch blurring of those lines, so much movementtoward deregulation, that when our associates invarious sessions ask me, “Well, how are we doingrelative to our competitors?” I have to say, “Well, itgets to be actually awfully complex to figure outwho our competitors are now.” In fact, some of ourclients also are competitors in various parts of thebusiness. And in some cases we are changing ourbusiness, so it becomes difficult to makecomparisons of how are we doing relative to ourindustry. This occurs not only because ofglobalization but because of the blurring of lines ofcompetition.

■ Broadening the Definitionof Benefits

The shrinking role of government also has animpact, not only because of financial constraints interms of Social Security and other programs butalso because the definition of employee benefits isbeing broadened. Many of us have a greatlyexpanded definition of employee benefits today,versus 10, 15, or 20 years ago. This is particularlytrue when you look at work-family, work-life, andalternative work patterns. Many aspects do not fitwith the traditional view of benefits consisting ofpension plan, medical plan, life insurance, andlong-term disability. As the definition of benefitscontinues to broaden, some natural shrinking of theinfluence of the government occurs, not only in theUnited States but on a worldwide basis. This occursparticularly in terms of defining what we can do,what we should do, and what we need to do withinthe arena of employee benefits.

Certainly other aspects could be added,such as the speed and rate of changes occurring inour business, as well as virtually any business, andour need to be adaptable in our programs, bothfrom a broader human resources point of view andto help people adapt to, be comfortable with, and,

ideally, even be enthusiastic about change. If wecould feel comfortable with that change, at leastthat would be a good step toward the enthusiasmand the embracing of change that most of usultimately want to have in place.

Also, again in terms of benefits, thereclearly is some influence from the great run that wehave had in the equity markets over a considerabletime period. That has some influence on how notonly we, but how our employees overall, feel aboutbenefits and some of the trade-offs and choices thatthey have to make. The trend toward outsourcingalso has some significant impact in terms of theway that the employment deal is being broadlyexamined and specifically within the employeebenefits arena.

■ Providing Challenging WorkThere are a number of ways you can look at thenew responsibilities that we have today asemployers under the new deal. Some of these aremuch more general from a human resource/business point of view and not as specific toemployee benefits. One responsibility relates toproviding interesting and challenging work forpeople to do. We have looked at what motivatespeople, what commits people, what engages people,whatever verb is used today. From some of ourconsulting work, we have identified seven differentkinds of factors. Our research shows that thesefactors commit employees, engage them, keep, orretain them in a focused and motivated way.Certainly compensation, pay, and benefits are keyelements, but in at least some of the companies wehave worked with, the most important factor is thework that people do.

The kinds of questions that arise are,“What are my opportunities?” “What can I move toin the future as I look at how things might changein the future?” Other issues revolve aroundrelationships with managers, co-workers, and thequality of life. “Can I find some reasonable balancebetween the work and the rest of my life here?”“How do I feel about the leadership of theorganization?” “Do I feel like we are going in theright places and that I can make a difference andwill have some impact on that?” “Do the cultureand purpose of the organization align with what isimportant to me as an individual?”

Benefits are a subset of one of those seven

17

Chapter 3

factors, and, as others have said, not the driver thatis going to grab hold of people. If someone zeroes inon a particular benefit provision in an intensiveway, it probably means that there is someunderlying question or issue, such as, “Howimportant am I?” or “How much do you valuediversity?” Or whatever the question might berelated to those benefits. Thus, providinginteresting, challenging work and work that isconnected to where the business is heading is animportant aspect of the ultimate responsibility ofan employer, at least if you want to be successful ingetting the right people, having them focused, andhaving them feel good enough to want to stay withyou.

■ Shared ResponsibilityAnother key part of the new deal is sharedresponsibility. We need to be clearer about theresponsibility of the employer, as well as theresponsibility of each of us as individual employeesor, in our terminology, individual associates. Wespend quite a bit of time talking about sharedresponsibility, shared success, and what thatmeans. Along with the responsibility that employ-ees have, they also need to have the right kinds oftools to help them be effective in their jobs. Andclearly that also translates into tools to help thembe effective in making appropriate decisions. Thesearen’t necessarily the “right” decisions becausemost of us, even in our own investment plans, makethe wrong decisions if you compare everythingagainst the ideal of selecting the absolutely rightinvestment option and turning it into a differentinvestment option at exactly the right time. Muchof the responsibility involves training, develop-ment, and long-term employability so that youensure that people can adapt to the tremendousamount of change that we are throwing at them.We need to do that to try to stay at least a half astep ahead of most of our clients. We have given uptrying to stay a full step or two ahead of most of ourclients because we are all running pretty fast here.

Certainly, one of our overall responsibilitiesas an employer, but especially from a benefits pointof view, is to provide an appropriate level offinancial support that allows employees to selectthose things that are most important to them, thosethings that rate highest in terms of both their

needs and their wants. We also need to providebenefits that make economic sense for us as abusiness enterprise because, ultimately, success ofthe business has a substantial impact on thesuccess of individual employees. So we are workingtoward what we would view and discuss as a win/win shared kind of environment.

The next step is to be more specific aboutemployee benefit areas. For example, we need tolook at the whole retirement area or financialsecurity, mostly defined benefit, definedcontribution kinds of plans, and some of the retireemedical would fit into this. Again, there are someparallels with the overall responsibilities. One isdefining the responsibility or the roles of theemployee and the employer in a way that makes itclearer to individuals. The message is, “You know,here’s what we do, here’s what your responsibilityis,” and you keep communicating that over and overin the process.

But to do that, we also need to recognizethat one of our responsibilities is to designprograms that are understandable, so that peoplecan determine what will have the bigger impact interms of their ability to accumulate appropriatefunds for retirement, which ultimately is theobjective. I am not sure that 10 or 15 years ago wefully understood this goal of people saving andhaving appropriate amounts of money forretirement. We focused on eligibility rules,investing rules, and early-retirement provisions,and we were not focused quite as much on howpeople can accumulate more assets. Today, this is akey part of the process, with investment educationand the trend toward defined contribution plans.

Another goal is to make these plans asuseful as possible so that the right information andthe right choices are available. This is notaccomplished by handing out a booklet once youmake plan changes and then hope that employeescan find that booklet three years later when theyactually need to do something. The goal is to makethat information available on a real-time basis, in auseful, user-friendly way. One reason, common toall of us and certainly all the people in ourbusiness, is that everyone says, “I don’t haveenough time. I don’t have enough time to try to finda booklet that was sent to me a couple of years ago,to try to find the right section or to put thattogether with inserts that might come out from


18

time to time.” So we are trying to provide ourpeople with information more on an electronicbasis, an easily accessible basis, using the samekinds of electronic tools that we use for our ongoingwork so that people can go in and grab thatinformation when they need it. Or we provideinformation through voice response systems orbenefit center representatives who can answerquestions in a quality, efficient, effective way.

This goes back to providing the right kindsof tools, whether it is access or modeling kinds oftools, particularly in the retirement area. Again,the goal is not to try to decide the right choices forindividuals but to help them understand what youcan learn from historical information, frompatterns in the past, and recognize that it is notjust about growing at different kinds of rates butthat there are risk and reward trade-offs undereach type of investment option. Like others, we arevery much on the front edge of beginning to use theInternet for some modeling activities for our peopleor for employees of our clients. But 5 or 10 yearsfrom now, this tool will provide an alternative thatI think will be much more powerful than some ofthe things being done on voice response or throughbenefit center representatives today.

■ Becoming an Expert BuyerGoing back to the responsibility of the employer,there is an opportunity and a responsibility to bean expert buyer, to assure that the serviceproviders, whether they are investment managers,outsourcing organizations, or communicationconsultants, are providing good quality informationbecause those are things that you can do as anemployer that individuals simply cannot do.

In terms of health care, issues are verysimilar to those in the retirement area. Asemployers, you can provide access that individualscannot get, such as a wider array of choices as wellas some information about the quality of providers.As an industry, we are just beginning to providesome better quality information on health careproviders, whether they are plans, healthmaintenance organizations, individual physicians,or hospitals. As you offer more choices, there is anopportunity and a responsibility to provide moredata initially. Then, over time, you would like toprogress from supplying data to information to

knowledge. I am not sure that we ever will get towisdom in that continuum, in helping employeesunderstand everything within the benefits arena.

Problem resolution clearly is a bigger issuein the health care area than it is in the retirementplan area because there are more interactions. Sosome of the employer’s responsibility rests inhelping employees through the problem-resolutionprocess. That can be done in a number of ways.Providing tools and encouragement for employeesto manage their health also recognizes that thesebenefits are not restricted to times when employeesget sick or hurt; they also can minimize or reducethe chances that employees or family members getsick or hurt and need to access these benefits.

■ ConclusionAgain, these are similar issues, from the broaderand newer definitions of benefits from a work lifepoint of view. It is easy to talk about wanting tohave a win/win scenario between the company andthe employees, but certainly our employees, ourassociates, are constantly watching to see if wereally walk the talk. Are we really willing toprovide workplace flexibility, knowing that we haveexpectations to be available and accessible? So, howwell do we walk the talk, provide win/win scenariosand really look for those on a broader work lifebasis, recognizing the pressures that people areunder these days?

Part of our responsibility here is to helppeople understand that the goal is not totally aboutcreating a warm fuzzy environment. We also havebusiness needs, and we need to look for the waysthat the needs of the employees overlap or meshwith the needs of the business. It is not alwaysabout saying yes but looking for the win/win wherethe two needs meet.

You already know that there are no easyanswers and that this is an ongoing process. Part ofit involves letting go of the old deal, doing it in asmart way, in a kind way, in a way that transitionsat an appropriate speed. And, ultimately, from abusiness point of view, it is about maximizing theoverall investment or expenditures that are madein benefits. There are large dollars being spenthere, and although I would love to say that wefigured out the perfect algorithm and applied it inour business to equate benefit expenditures with

19

Chapter 3

ultimate productivity, I would be skeptical ofanyone who would say that they are doing anythingmore than taking baby steps in that direction. Butby looking at our responsibility as an employer andexamining how we can appropriately engage andconnect people with the business, we can provide aripe area for analysis and for starting to learn moreabout the impact on turnover and its financialconsequences.

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Chapter 4

■ Incentives and RewardsWhat is happening on the incentives and rewardsfront? What is happening with the elements ofcompensation with which we are all familiar? What

4Do Employee Benefits Figure in TopManagement’s Business Agenda?by Francis N. Bonsignore

Chart 4.1Meeting Business Objectives: The Arsenal

FinancialAssets

PeopleResources

Experience, MarketPosition, andReputation

Technical/ProprietaryAdvantages

Chart 4.2People Resources

CapabilitiesOrganization/Deployment

ProcessIncentives/Rewards

Culture

■ Meeting Business ObjectivesDo employee benefits figure in top management’sbusiness agenda? Whether you are in a professionalservices business, financial services, manufactur-ing, or a consumer goods enterprise, you considerthe future of the organization in terms of expecta-tions of what top management will deliver and theresources available for a chief executive officer orsenior line executive to accomplish the businessagenda (chart 4.1).

These resources include broadly defined financialassets, both those that are readily liquid and hardassets that have a value, balance-sheet strength,borrowing capacity, etc. There also are technical orproprietary advantages such as product position-ing, trademarks, patents, and copyrights. And,perhaps, in the bottom right quadrant, we too oftendiscount experience, market position, and reputa-tion as elements that can be deployed as part ofbusiness strategy.

■ People ResourcesOne level down are the people, the resourcesavailable for the accomplishment of the businessagenda (chart 4.2). There are a number of peopledimensions: their talents, how they are organizedand deployed, the processes in place to managepeople and carry out the tasks of the business, theincentives and rewards offered for performance andaccomplishment of assigned duties, and the culturein which they operate.

➝

➝

➝

Chart 4.3Incentives and Rewards

Elements Value/Leverage for Effecting Change

Fixed

Variable

Equity

Perks —

Benefits ?

22


is happening in terms of their value or theirleverage for bringing about change in the organiza-tion? (See chart 4.3.)

The value of fixed compensation, or whatwe commonly refer to as base salary, for bringingabout change is declining. Currently, it is the priceof admission. It is what we have to be able to putup to compete in the marketplace for the acquisi-tion of talent. But in terms of how we actuallymarshal that talent to accomplish business ends,we are not going to be able to leverage fixed com-pensation.

Variable compensation in the form of cash,whether it be tied to business results or theachievement of individual objectives or group goals,is rising. We read about it all the time. You can pickup the Wall Street Journal virtually any day andsee some mention of variable pay.

Equity is no longer reserved for the upperechelons of the organization. The concept of stockoptions reaching down to individuals in the lowerbranches of the organization is at least a decadeold. Equity in the form of contingent stock, orperformance-based stock, whether it be for execu-tives or for a broader group of employees, is gainingmomentum because of its intrinsic motivationalvalue and its leverage for bringing about change.

While I do not assign perquisites muchimportance in terms of organization change, thequestion of whether employee benefits can be usedto bring about change needs to be addressed. Thatis the purpose of this policy forum.

Chart 4.4“Business Logic” Will Prevail

• Economics are of higher importance for both employers and employees.• Critical considerations:

— Tax effectiveness to employers and employees— Competitive value to the employer— Government mandates— Employer flexibility

■ The Prevailing Business LogicToday, there is a new prevailing business logic(chart 4.4). One could argue that it has alwaysexisted, but it has a sharper edge today. Namely,economics is more important to both employers andemployees. For employees, economics translatesinto “What I am able to depend upon in terms of

securing my livelihood; whether I have a job andwhether that job conforms with what I need to haveto meet my particular objectives?” Economics foremployers translates into the fact that we live in amuch more unforgiving world than we did 20 or 30years ago, when a public company might be able togrunt and get over a bad year. With the scrutinygiven to organizations by investors and shareholdergroups today, a bad year may prove to be your lastyear.

This means that the critical considerationsin this new algorithm put a harder edge on econom-ics. And the critical questions to consider are: Is ittax effective to the employers and employees? Whatis the competitive value to the employer? What amI really getting out of this significant investment,often the largest investment outside of direct pay?What government mandates am I forced to provide?And, also important, how much flexibility do Ihave? So here we have a changing context.

Chart 4.5A Changing Context

• Bilateral (employer/employee) relationship has evolved into“trilateral” (employer/employee/external entities).

• Economic impact has migrated from marginal (“fringe” benefits) tocentral, embedded semi-fixed costs.

• Entitlements are arguable.• “Costs” have broader meaning; e.g., real cost, profit and loss,

balance sheet expenses, opportunity costs, market, and othercompetitive costs.

■ A Changing ContextThe old notion of 50 or 60 years ago that we have abilateral relationship between employer andemployee has evolved in terms of benefits to atrilateral relationship among the employer, em-ployee, and external entities (chart 4.5). Theeconomic impact of employee benefits has migratedfrom marginal, or what we used to call “fringe,”benefits, to central, embedded, semi-fixed costs.They are large, and I characterize them as semi-fixed because even though we can say, “Well, this isa variable cost that we can affect in some particularway,” the reality is that, organizationally andpolitically, these costs can be modified to only alimited extent.

Entitlements, both in terms of governmententitlements and those aspects of the employer-employee contract that the employee may have

23

Chapter 4

learned to characterize as entitlements, are argu-able. They may not be vulnerable at this point, butthey certainly are up for debate in terms of whatemployer obligations are to shareholders and to theother stakeholders in the enterprise. If my businessis under severe pressure to survive, to compete orto achieve a particular level of performance, howbound am I to these arrangements that have creptinto the employer-employee relationship over theyears and may be inhibiting?

Finally, costs have a broader meaning. Dothey represent, in fact, a hit to the income state-ment? A balance sheet liability? Are there opportu-nity costs? Could I make better use of the dollarsthat I am investing in employee benefits? Or arethere market costs, or other competitive costs, thatare affected by my acting or not acting?

Marketplace/competitive position

Chart 4.6Elements Affecting the Employer’s Decision

Full-time employees/unions

Part-timeand other

“nontraditional”employees

Government regulations(PBGC, DOL, IRS, SEC, ERISA, ADA, PMLA)

“Private”regulators(Actuaries,CPAs, FASB)

Employer

■ The Employer’s Decision ContextThe employer’s decision context is fairly complex(chart 4.6). In addition to the employer, theemployer’s relationship to the respective market-place and competitive position, we have full-timeemployees in nonunion settings, unionized employ-ees, the advent of part-time work, and what wehave come to label as nontraditional employees. Forthose who doubt the legitimacy of this latter group,the recent UPS strike brought home the fact thatsuch arrangements are absolutely a front-and-center issue today. A host of private regulators—actuaries, CPAs, the Financial Accounting Stan-dards Board—as well as a plethora of governmentregulations affect what happens. This does not

disturb me too much because the more complex thispicture, the more opportunity for one of our signifi-cant businesses to assist employers in sorting outall this. So there is a silver lining!

Chart 4.7Policy Forum Questions

• Whether employee benefits are still needed to attract, retain, andexit workers.

• How, in the midst of change, are key employees most effectivelyretained? What benefits play a role?

• What changes in human resources philosophy and organizationalculture have been made or are being made that affect the role ofemployee benefits? What are the objectives?

■ The QuestionsLet’s recapitulate this policy forum’s questions: Areemployee benefits still needed to attract, retain, andexit workers? (See chart 4.7.) How, in the midst ofthis change, are key employees most effectivelyretained? What role do benefits play? And whatchanges in human resources philosophy and organi-zational culture have been made, or are being made,that affect the role of employee benefits?

Chart 4.8Let’s Recast the Questions

Putting aside entitlement issues, what roles do benefits play inmeeting business objectives?

I would not presume to try to answer all thesequestions, so I boiled them down into one questionthat, excluding the entitlement issues, is: “Whatroles do benefits play in meeting business objec-tives?” (See chart 4.8.)

■ Benefit TypesTo get a better handle on what employee benefitsare, I have derived my own shorthand with fourcategories (see left column of chart 4.9). The firstcategory is government-mandated benefits: SocialSecurity, disability, and workers’ compensation. Aprincipal characteristic of these is that they arerules-driven. We can question the rules, we cansend new people to Congress to change the rules,and we can go to the Conference Board or toorganizations like the Employee Benefit ResearchInstitute and learn about how those rules may

24


Chart 4.9Benefits Can Be Segmented

into Broad Subsets

Employee PrincipalBenefits Category Examples Characteristics

Government-mandated Social Security, disability, Rules-drivenbenefits workers’ compensation entitlements

“Core” benefits Medical, postemployment Aggregate costsecurity programs driven; semi-fixed

business costs

“Lifestyle” benefits Employee assistance Employee selectedprograms, work/family, and unit cost driven

dependent care

“Custom” and Noncore benefits, Employee-funded andother benefits flexible savings accounts/ employee relations

cafeteria plans driven

evolve. But we are stuck with the rules.From an employer’s point of view, core

benefits—medical and post-employment securityprograms being the most prominent—tend to belooked at in terms of aggregate cost. It is a bignumber. How is that big number changing year toyear? And, as mentioned, are they actually semi-fixed? We can play with them around the edges abit, but it takes a long time to change or reversedirections, and sometimes we declare victory byvirtue of the fact that the number remains flat.

A third category is lifestyle benefits, suchas employee assistance plans, work/family facilitat-ing services, and dependent care. These are em-ployee-selected and driven by unit costs. They arecapitation-type programs. If, in fact, the employercan provide that particular service and be deemedto be responsive, you can go ahead and offer it, butit is a selection on the part of the employee. Andlastly, what I call custom and other benefits are notcore benefits. These are, for example, flexiblespending accounts and cafeteria plans that arelargely employee-funded, pretax programs. Fromthe employer’s point of view, their value is thatthey contribute in some way to effective employeerelations.

■ The Employer as DistributorWhat role do benefits play in achieving theemployer’s business agenda? One reality is that theemployer clearly has become the distributor of

choice (chart 4.10). Public policy has supported this.The costs of providing the types and levels ofemployment benefits that have been institutional-ized among large, mature employers are beyond themeans of most workers to provide for themselves onan individual payer basis. There is financialleverage among employers on third-party providers,whether they are insurers or money managers, andthere are opportunities for achieving some econo-mies of scale in terms of delivery capabilities. Inour own organization, one of the areas to which wesee this leverage being applied now is the rational-ization of the number of health maintenanceorganizations (HMOs) and the agreements andcontractual provisions we have with HMOs acrossthe United States. And lastly, favorable tax treat-ment for employer programs has reinforced theadvantages that accrue to employers for providingthese programs.

■ The Provision of Core BenefitsClearly, in a competitive world, mainstreamemployers—large organizations, establishedorganizations, not start-ups and not small employ-ers—are bound to provide the core benefits (chart4.11). It is the price of entry and a source of legiti-macy; employees expect such plans. Even whencore benefits plans are comparable, they differ interms of how critical the provision of a particularprogram is to the labor market and the nature ofthat labor market. The particular value to individu-als also varies by industry and labor market.

Levels of benefits are different as well.Ratios of employee-employer plan funding are nolonger sacrosanct. The fact that a certain cost-sharing arrangement existed for a long period oftime does not mean it is inviolate. If business

Chart 4.10The Employer Has Become the “Distributor

of Choice”

• Public policy has supported this.• Cost of providing the kinds or the levels of employee benefits on an

individual-payer basis are beyond the economic means of mostworkers.

• The financial leverage employers have on third-party benefit“vendors” (e.g., insurers, money managers) and scale are key(delivery efficiencies).

• Favorable tax treatment for employer programs reinforces employeradvantages.

25

Chapter 4

■ “New Age” Benefits“New age” benefits are often characterized not onlyas desirable on the part of the employee but,potentially, as performance enhancers (chart 4.14).We can provide work, family, or dependent careprograms at relatively modest cost. Nontraditionalwork arrangements require programs that can becustomized, and these types of benefits fit in nicely.But the gains and the price-value relationship aredifficult to measure in terms of whether theyactually contribute to any productivity improve-ment or greater satisfaction that leads to economicgain. Thus we come back to the consideration thatas they are relatively low cost, why would youforego them?

Chart 4.11Competition Forces “Mainstream”

Employers to Provide “Core” Benefits

• Employer’s “price of entry” and source of legitimacy• Employees “expect” such plans• Comparable plans vary as to:

— Labor market criticality— Levels of benefits— Ratios of employer/employee funding— Impact on employer business economics

conditions warrant, these ratios are being changed.And the impact on the employer’s business econom-ics is a front-and-center issue.

■ The Employer’s Life CycleClearly, the organization’s position on the maturitycurve and in its own life-cycle can drive benefits(chart 4.12). If we look at those mainstreamorganizations at the extreme as being theestablished, mature firms that commonly havebeen the leaders in terms of providing core benefits,there is modest variability and core benefits areconsidered semi-fixed costs of doing business. Onthe other extreme of that maturity curve, for theclassic start-ups and small organizations, certainlythose resulting from the U.S. technology boom,there is a natural propensity on the part ofmanagement to try to avoid some or all of theinstitutionalization of these benefits costs by usingequity as an offset and a much more attractivecompensation vehicle.

Chart 12Company Maturity and “Life Cycle”

Can Drive Benefits

At the extremes ...

• Established, mature firms commonly provide at least the “core”benefits (i.e., “variable” costs of benefits viewed as “semi-fixed”costs of doing business).

• Classic “start-ups” avoid some or all benefits, using equity asprimary compensation vehicle.

■ LeverageCan benefits be leveraged? I believe core benefitsrarely serve as motivators or enablers of enhancedperformance. They are the price of participationand, in effect, large employers view them as anencumbrance with little or no upside (chart 4.13).

Chart 4.13But, Can Benefits Be Leveraged?

• “Core” benefits don’t often serve as motivation vehicles orenablers of enhanced performance.

• “Price of participation,” in effect, becomes an encumbrance withlittle or no upside.

Chart 4.14So Called “New Age” Benefits Are

Positioned as Performance Enhancers

• Work/family, dependent care programs, and the like respond toemployee issues at relatively modest cost.

• Nontraditional work arrangements require programs that can becustomized.

• Gains and price/value are difficult to measure.• The cost is relatively modest.

■ Employers’ ExpectationsWhat are the employer’s expectations of corebenefits? (See chart 4.15.) There is economicpressure to control and manage expenses. If Icannot make them smaller, at least I do not want tomake them bigger. Business circumstances havealtered the employer-employee contract. Thedownsizing trend of the last 10 to 15 years hasdemanded that employees move away from thetraditional contract as relevant for all employees; Icertainly can make fewer people party to thatcontract. So, by and large, core benefits havebecome a permanent cost dimension, andcompanies have to question their business valueand whether they help achieve parity vis-a-vis

26


Chart 4.15What About the Employer’s Expectations

of “Core” Benefits?

• Economic pressure to control and manage expenses• Business circumstances have altered the “employer/employee

contract.”• “Core” benefits have become, by and large, permanent cost

dimension.• Companies must question the business value of these along the

continuum from parity to competitive advantage.

competitors or if there is any competitiveadvantage. Most employers probably characterizecore benefits as parity.

■ Employees’ Valuation of BenefitsDo employees value all these benefits? (See chart4.16.) Core benefits are fungible. Among largeemployers, employees look at core benefits as theante. Nontraditional programs, or programs that gobeyond the core, demonstrate responsiveness. Thepremium is on plan design and flexibility, particu-larly if we have new employment models, nontradi-tional arrangements, more part-time workers, andmore customized types of employment settings.

Chart 4.16How Employees “Value” Benefits

• “Core” benefits more or less fungible (the “ante” for largeemployers).

• Nontraditional programs demonstrate responsiveness.• Plan design flexibility features in new employment models.

goes with the regulation and the monitoring thataccompany these programs.

Chart 4.17How Employers “Value” Benefits

• Acceptance by employers as “distributors of choice”• Variability regarding the levels of coverage offered and employer/

employee sharing of the cost of such benefits (fewer sacred cows)• Shifting of benefit “design” and funding responsibilities from

employer to employee• Shouldering of regulation and monitoring as the condition for tax-

favored treatment

■ Employers’ Valuation of BenefitsFrom the employers’ point of view, there is accep-tance that employers in mainstream organizationsare the distributors of choice (chart 4.17).Variability exists in the levels of coverage offered,and the sharing of those costs is more evident. Itcertainly is in our organization. But there are manyfewer sacred cows. Benefit design and fundingresponsibilities are shifting from the employer tothe employee. The employer provides the broadlandscape, and the individuals design programsthat fit their circumstances. And there is apresumption that if employers receive tax-favoredtreatment, they have to shoulder the burden that

■ The Changing ContextEmployee benefits remain, but the context in whichwe view them has changed (chart 4.18). In my view,benefit programs are questionable as explicit toolsto attract and retain human resources. Heightenedplan regulation and monitoring, as well ascustomization, have, if anything, increased theircomplexity. With that complexity come design,compliance, and ongoing operational costs, all ofwhich lead to the last point: Employee benefits arebeing scrutinized to a much greater degree from theperspective of financial analysis that seeks to linkthe provision of these programs with what is beingachieved in the business.

Chart 4.18Employee Benefits Remain; but the

“Context” Has Changed Radically

• Benefit programs are questionable as explicit tools to attract andretain human resources.

• Heightened plan regulation and monitoring as well as the“customization” of benefits have increased complexity.

• With complexity come significant design, compliance, and on-goingoperational cost.

• The prism of financial cost analysis has refocused on the associatedcosts of benefits offered and the linkage to achieving businessobjectives.

■ A New ModelIs there a new and improved model from both theemployer’s and employee’s points of view? (Seechart 4.19.) There are a number of factors in themix. From the employee’s perspective, what are thecriteria that are going to be weighed? Within anarray that includes choice, customization, portabil-

27

Chapter 4

Chart 4.19The “New and Improved” Model

for Employee Benefits?

Examples of Factors in the Mix

Employee Employer

• Choice, customization • Tax and social policy• Portability • Efficiency of programs• Tax effectiveness • Flexibility• Alternative providers • Outsourcing• Lifestyle conformity • Migration to new owners/joint ventures/

alliances• Relative value • Business cycles, maturity of enterprise,

staying power

ity, individual tax effectiveness, alternative provid-ers, the cost of those alternatives, lifestyle confor-mity, and relative value, which ones am I willing togive up or compromise to retain those that havethe greatest value for me?

On the employer’s side, the factors clearlywill be tax and social policy, efficiency of programs,

flexibility and outsourcing. Is the program going tobe managed within the organization? Am I makingan organizational commitment to program mainte-nance? Can I migrate this program to new owners,to joint ventures, for alliances? We no longer areself-contained, monolithic organizations. We have afull range of new things happening with respect tohow organizations function. For example, considerthe recent decision of the Sara Lee Corporation tooutsource its manufacturing. It is difficult tounderstand that a company can outsource manu-facturing. Whatever we put in place, we have to beable to undo or to pass over, or at least not createan impediment to any of these joint ventures,alliances, or other significant organizationalchanges.

Finally, where am I in the business cycle?How mature am I as an organization? And do Ihave staying power? Once I have made this com-mitment, am I willing to take the economic respon-sibility?

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Chapter 5

5Benefits: Labor Strategy for the Futureby Ronald Blackwell

■ IntroductionAs the Director of Corporate Affairs at the AFL-CIO, I would like to offer our perspective of what isgoing on in the world of benefits and how we viewthem both from the perspective of labor’sresponsibility and employer responsibility.

Like wages, benefits are a fairly complexphenomenon in the employee relationship. Benefitsare a real cost to the employer, and we are mindfulthat they are a tough cost to bear in an increasinglycompetitive world. Costs to the employee are a partof their income, an essential part of their income, atleast as important as the wages they earn, and thehigher the cost, the lower the benefit. Or the higherthe benefit, the lower the cost. Hence, employersand employees have a difference of interest here,which can be a conflict of interest. But benefits, likewages, constitute more than simply income on oneside and a cost on the other side. They are anexpression of the nature and the quality of theemployer/employee relationship and that,increasingly, in America today, is out of kilter.

■ Different Views of SuccessWe want our employers to be successful. If ouremployers are not successful, then we have no jobs.But employers can be successful in different ways.We want them to be successful in ways that benefitnot just themselves, their shareholders, and theirchief executive officers, but also the people whowork for our employers, the people who live in thecommunities in which our employers are active,and the families of our employees. We think thereis a possibility here to find a way in which this canwork, not just for business on the one side and foremployees on the other side, but for both. And webelieve the country benefits if we find those ways.But to do so, we have to question some seriouspremises that we share.

■ Historical PerspectiveThe first thing to question is where we are rightnow. An Employee Benefit Research Institute IssueBrief1 includes a diagram of total compensation andhourly wages from 1953 to 1992 or so. Althoughthese do not resemble numbers we use, it providesan interesting perspective of where we are inhistory. The post-war period in the United Statesdivides rather neatly into two periods, 1949 to1973, and the period after. From 1949 to 1973 wasa period of relatively rapid economic growth, morethan5 percent a year. Rapid productivity growth andwages and benefits tracked productivity, step forstep. It was a period during which real familyincome basically doubled, the American middleclass was built, and every decile of the Americanpopulation saw their living standards rise. In fact,the lower you were in the American livingstandards, the faster your income was rising.

The period since 1973 is rather different.Economic growth has slowed. We pat ourselves onthe back about how fast the economy is growing,but it is growing on average in that second periodabout half what it did in the first. The connectionbetween productivity and wages has beenshattered. Since 1979, productivity has increasedmore than 30 percent, and total compensation hasdeclined more than 12 percent. This second periodis characterized by a different pattern socially,economically, and in terms of business strategy.This is a period in which only the top 20 percent ofAmerican families have seen their incomes rising.The bottom 80 percent either have seen stagnantincomes or falling incomes, despite the fact that

1 Dallas Salisbury, Ken McDonnell, and EdinaRheem, “The Changing World of Work and EmployeeBenefits,” EBRI Issue Brief no. 172 (Employee BenefitResearch Institute, April 1996).


30

they are working more hours, working more jobs,and more members of the family are working.Although they are more productive now than everand we live in a $7 trillion a year economy, thefamily incomes for the majority of Americanworkers are falling.

On the benefit side, we are seeingdecreased health care coverage, decreased benefitcoverage, the shift from defined benefit to definedcontribution plans and falling vacation coverage.And soon, I expect to see an elimination of theweekend, at least if we stay on the course that weare on. This is not only bad for American workers,it is intolerable. And we believe it is bad for Ameri-can society because it opens up a rift—not justeconomically but socially, culturally, and increas-ingly politically—in our society that is unsustain-able.

Is this good for business? We have abooming bull market, and corporate profitability isvery high. It is almost back to the levels that it sawin the best part of the earlier period. Executivecompensation is off the map. While these are betternow than they have ever been for some members ofour society, they are not better for workers and fortheir families. But are these trends good forbusiness? I argue that they are not, that this is avery weak environment in which we are actingeconomically with regard to the performance andthe long-term competitiveness of our firms.

I came out of the clothing and textileworkers union, which represents a range ofemployees in industrial companies, including XeroxCorporation, Johnson & Johnson, and others thatare dealing with increasing competition in theworld market. This also is one of the major factorsdriving the change from the earlier period to thelater period. We learned that working people knowthings about their work that management not onlydoes not know but cannot find out except fromthose workers. But our negative employmentrelationships are blocking worker commitment,creativity, and knowledge, which are invaluableresources for the competitiveness of companies in arelatively high-wage country like the UnitedStates. The high road to competitive success mustfocus on product quality and customer service andmust meet the cost competition through increasedproductivity. To do this requires employee commit-ment, the harnessing of employee imagination, and

the mining of workers’ knowledge.There are two other ideas to consider. The

discussion about our economic policy is mono-polized by a tug of war between omnicompetentmarkets on one side and incompetent governmenton the other side. Where business fits into this, I donot know, except that business does what it has todo, what the market makes it do. The happycircumstance is one in which it turns out that it isthe best for everyone. But in this case, it does notturn out the best for everyone. It is not good forbusiness, and business has a choice to make abouthow it is going to meet international competition,while the government has a role in helpingcompanies meet that competition in ways thatbenefit not just the employers but the people whowork for them.

■ Job Insecurity and KnowledgeHoarding

The major barrier in the current employmentrelationship that blocks the ability to tap into orengage the commitment of employees—to be able toharness their creativity and to mine theirknowledge—is that they have no security that theirknowledge and their contributions to the companywill not be used against them. I call it the “RalphKramden” problem. If you put the suggestion in thesuggestion box at the bus company, you will be firedthe next day when they take up your suggestion.Workers know this and it causes them to hold on tothe knowledge they have instead of contributing itto the company. Workers have to be shownsomething in the way of employment security tocontribute their knowledge.

Their second major concern is benefits.Benefits are something they rely on to provide aneconomic basis for their family’s lives. Beyond that,they are a sign of the quality and the commitmentof the employer to that employee. If the employerdoes not care anything about your retirement orsays, “You just simply have to take care of thatyourself,” a different relationship is created fromone that results if the employer has a program thathelps employees take care of their families.

And then there are wages. While wages area very important concern, they are not the leadingconcern of workers. Benefits, in terms of income,

31

Chapter 5

are the most important factor for workers. And foremployers, benefits are the most important way inwhich they can show, if they cannot guaranteeemployment security, that they do care aboutwhether their workers are going to be able to puttogether a life for themselves and their families.

If we could find ways in which we couldrecognize the realities of the new global era we livein, then the responsibility of labor and workers is tolet go of the old world. The world has changed. Weneed new ways to engage employers, new ways tohelp business become successful, new ways todeliver income to our members. But we’re not goingto give up our old ways unless we know there issomething else for us.

We need to see the commitment on theemployer’s side first and foremost, but we also needto see the commitment from the governmentbecause too many of our companies talk aboutpursuing the high road but they travel the lowroad. Or they travel the high road a while and thenthey drive off into the ditch. We have to work withcompanies and management that are prepared totravel the high road. As we say at the AFL-CIO,“We want to pave the high road,” but we also haveto be prepared to block the low road. We also needthe government to help protect companies thatwant to travel the high road from competitors whoare prepared to use any means at all possible toundercut, take their markets, and beat theirbusiness.

There are real opportunities forcooperation on the benefits issues as well as on thebusiness strategy issues. If we are able to find morecommon ground, we can build not only a benefitpicture that makes sense going forward but alsobusinesses that make sense going forward.

■ Pension AssetsWe also want to organize workers’ assets so thatthey work for workers. Pension assets alonerepresent more than $6 trillion, or more than25 percent of all publicly traded companies. Welikely own more of any individual company collec-tively than the person who runs a company. But wedo not act like owners. Pension obligations stretchover decades. So someone who is managing thatmoney, strictly from a financial point of view, oughtto be able to survey over decades to be able to

determine the largest rates for attractive invest-ments. But that is not the way our money ismanaged. Our money is managed to earn thehighest rate of return, quarter to quarter, just likeevery other sum of money. And often that involvestearing up the companies of which we are a part,savaging their research and development budgetsand workers’ benefits so that they can show ahigher rate of return.

That is not good for our members, it is notgood for the long-term viability of that business,and it is not good for the retirement security of ourmembers. And it is fiduciarily irresponsible becauseunless capital markets are perfect, there is noreason to believe that three-decades-outperformance is reflected in instantaneous spotmarkets. Particularly in multi-employer situations,our union trustees are trying to educate on thephilosophy of long-term investment that gets ourmembers to retirement and that provides patientcapital to employers to help build their businessesand build the future of their businesses in terms ofresearch and development, training, and the thingsthat are now lacking in American business.

On the capital side, that is the objective.That could be done either through shareholderactivity, on which we are very focused, where thetarget is not staying out of companies, it is gettingin companies because we want a voice as owners ofthese companies about how they are competing andwhat is responsible and what is not. Are theexecutives getting paid for what they do for thebusiness? Or are they simply gouging because theyhave a cozy board? That question is very central toour concerns.

Apart from shareholder activities, this kindof money can serve as direct investment. It can helpproduce high-road businesses and sustainablecommunities, and we will have programs for tryingto use it in that kind of way. But we are looking notjust to the capital markets but also to the productmarkets. In health care in particular, we representmillions of lives, and corporations are reorganizingthe health care industry with a focus entirely onthe price of health care. That is important, butwhere is the quality in health care? And who isusing market power to argue for higher-qualityservices, which means treating people who deliverhealth care in a decent way?


32

■ ConclusionWe definitely are going to organize our assets,whether they are in the product markets that weare active in, or in the capital markets, to try toprovide our employers with a high-road competitiveopportunity that will benefit our members in thelong term but also serve the fiduciaries who areresponsible for those assets.

33

Chapter 6

6The Key to Successful Downsizing:Partnershipby James King

■ IntroductionThe U.S. government is the largest employer in theUnited States. At the end of 1992, it had about2.21 million people on its payroll. Now it has about1.88 million people on its payroll. The record at theOffice of Personnel Management (OPM) and ingovernment has to be seen in the overall context ofthe goals of the current administration.

Prior to this administration, and for anumber of years going back to 1968, in what wascertainly a bipartisan effort, presidents, governors,and, in many cases, mayors and county supervisorsdenounced government in general and thoserunning for federal office and the federal govern-ment specifically, vowing to cut it to the bone. Butsomehow, the government just kept getting bigger.President Clinton and Vice President Gore came tooffice committed to a federal work force that wouldbe both smaller and more responsive to the Ameri-can people, whom they viewed as its customers.

■ Reinventing GovernmentIn 1993, the vice president headed the NationalPerformance Review (NPR). The goal of the rein-vention of government, and the central point of thereinvention, was to reduce the work force by some273,000 people, or about 13 percent, over a five-year period. That goal has been exceeded. As of twomonths ago, the work force had 320,000 feweremployees, a reduction of more than 14 percent.

In my four and one-half years as director ofOPM, the government’s leader in human resourcespolicy, I felt we had an obligation to lead the way inreinvention. One of our basic assumptions wasthat, as the work force grew smaller, more would bedemanded of every employee, and our ability torecruit and retain the best possible work forcewould be central to our goal of increased efficiency

and public trust. During my time at OPM, wedownsized the agency by about 47 percent, from6,861 employees to 3,620 employees. In the process,we reinvented the agency and quite possibly savedit from those who think that our personnel officersand management in this area are redundant intoday’s marketplace.

We were acutely aware that we were notdealing with numbers but with people’s lives. Thisagency not only has responsibility for policy work,we are responsible for the health care of 9 millionpeople. It is the largest single health care programin the United States. We manage life insurance,disability, and the distribution of about $36 billiona year in our annuitant payments for their retire-ment. Therefore, about half the agency does thatkind of administrative work, and the other halfdoes the policy and the personnel type of work.

We all strongly believed that the adminis-tration had an obligation to carry out this massivedownsizing with enormous respect and regard forthe career of every worker involved. Therefore, inour agency, we recommended governmentwidedownsizing by attrition as much as possible. OPMassumed leadership in working to pass buy-outlegislation by the Congress that provided incentivesfor many non-Defense Department employees toleave government voluntarily. The Department ofDefense had already implemented a buy-outprogram. We also carried out a partnership withour employees, an aggressive career transitionprogram in our own agency, that had a success rateof more than 96 percent.

■ Work Place PartnershipsThe key to successful downsizing can be summedup in one word: partnership. When PresidentClinton took office, worker-management relationshad reached an all-time low, by all the surveys we

34


did. The president and vice president knew theycould not reform government without a change ofattitudes on both sides. To that end, the Presidentcreated the National Partnership Council. Itsmembers included senior government officials,leaders of the employee unions, and heads ofmanagement organizations. As the director of OPM,I chaired the council.

Our primary goal was to encourage thecreation of hundreds of work place partnerships allacross government. Today, there are literallythousands of work place partnerships in operation.About 70 percent of our bargaining unit employeesbelong to partnerships. In resolving differences,these partnerships reduce litigation, save millionsof dollars, and are deeply involved in downsizingdecisions. As you might expect, this was not ahappy task, especially in an area where jobs hadbeen structured as an entitlement after the firstyear of service and legal protections to those jobswere in place.

■ Privatizing InvestigationsOne of OPM’s greatest challenges was theprivatization of more than 700 members of ourinvestigations unit. OPM did about 40 percent of allthe background investigation work for the federalgovernment, including the Department of Energyand the nuclear programs that are directly tied tothat. The unit was supposed to be self-supportingby selling its services on a reimbursable basis toother agencies. Soon after I arrived at OPM, Ifound that we were millions of dollars in debt, wehadn’t broken even in more than 10 years, and theplace was abysmally managed because no oneseemed to have worked against a bottom line. Onone hand, you did not have to meet a federalbudget, and on the other, you were a reimbursableaccount. So many people viewed it as a “slushfund,” and there was no bottom line from which tooperate.

After an initial round of reductions inforce—that’s termination in the governmentacronym or RIF—we had to move very quickly toslow our dollar losses, and then the decision wasmade to privatize the unit. That could have meantmore RIFs, and that was what virtually everyoneassumed. These were skilled investigators, most ofwhom, if separated, could have found employment

with private investigation companies or even othergovernmental organizations. I was not satisfiedwith that approach, and I wanted to see if thesetalented people could be kept together, if possible,and be their own bosses, rather than someone else’semployees. I was aware that in the private sector,employee stock ownership plans, or ESOPs, havebeen used to help employees take control of theirown companies. I asked if that could be done withour employees.

In no uncertain terms, I was told that ithad never been done in the federal government inwell over 200 years, and that there were manypolitical and legal obstacles to it being done. On topof that, attacks would be generated at every levelby those who had vested interests in maintainingthe status quo. Many of the employees involvedstrongly opposed the plan. They wanted to staywhere they were, and they were absolutely con-vinced that if they could kill the plan for an ESOP,their jobs would be saved.

To shorten a very long story, a new com-pany, the U.S. Investigations Services, Inc., openedits doors in July 1996. Most of the employees areperforming the same work as they did before, in thesame locations, and starting with at least the samepay and comparable benefits. But they are nolonger federal employees. In fact, thanks to profit-sharing, they are doing better than our federalemployees. They gave themselves an 8 percentsalary increase last year, as compared to the2.8 percent received in the federal government, andan 11 percent stock dividend. We believe this can bea model for other federal privatizations in thefuture. Our best estimate is that privatization issaving the taxpayers about $19 million a year, andwill continue down that path for the foreseeablefuture. It will level off at some point, obviously, butthe savings will be equal to that, if not better, inconstant dollars from now on.

■ Expanding DiversityAnother of the president’s goals was to expanddiversity in government. Hispanics are significantlyunderrepresented in our government, and OPMtook many steps to recruit Hispanics more aggres-sively. For example, we visited predominantlyHispanic campuses, and on some campuses weinstalled touch-screen computers that literally

35

Chapter 6

bring up-to-date job information to the students’fingertips. On any given day, if you go to the WorldWide Web, there are about 4,000 jobs posted byOPM. It is the first time in the history of ourgovernment that we have been able to centralize ajob-hiring pool. I met with and spoke with Hispanicleadership groups and sought their cooperation inattracting more young Hispanics to government.The government continues to hire on a basis ofmerit, but at the same time, we are determined toreach out to the broadest, deepest possible pool ofpotential applicants.

Our government also has provided leader-ship in creating an outstanding variety of family-friendly programs that are helping workers balancethe demands of work and family. The first bill thatthe President signed when he was elected in 1992was the Family Medical Leave Act. And it proved tobe one of the most popular of his actions withAmerican working people. There also has been agreat deal done to expand alternative work sched-ules, part-time work, and telecommuting. At thesame time, we are going to have to keep a close eyeon the impact on these programs to measure howthey affect productivity.

■ Measuring Total CompensationOne of my concerns as director, which continues tobe a top concern of my successor, Janice LaChance,is what we call total compensation. While this wordis very familiar in corporate circles, it is a newphrase in the federal government. One reason isthe lack of a disaggregated budget, which meansthat managers do not know the real costs of em-ployees or the implication of either benefits or anyother aspect within that term.

We turned out the first report that dealtwith total compensation. What we did is to provideemployees with their hourly rate both with andwithout benefits. For example, for individualsearning $38,000 a year, their hourly rate came outto about $16.60 an hour, and their hourly salaryrate, including benefits, came to $21.82. This movetoward total compensation will help not only thepeople hiring and managing, it will help with theoversight that comes from the Congress, so theycan make some kind of sense out of what we do asAmerica’s largest employer.

Total compensation also deals directly with

employees. When the new majority took control ofthe Congress in early 1995, some of its leadersquickly declared that federal pay and benefits wereripe for cutting. As it turned out, the losses tofederal employees and retirees were minimalbecause these benefits, and most of these salaries,made sense. But the fact remains that federal payand benefits should not be a political football,which is terrible for employee morale. I do notthink there is an effective corporation in Americathat would literally negotiate wages or health carebenefits every single week and create a level ofinsecurity that is totally unnecessary. There areenough insecurities in life today.

OPM is opening its new, total compensa-tion center, and that should lead to our overallcompensation reform effort. We will developproposals for the performance-oriented, totalcompensation system envisioned in our strategicplan. We want this center to gather facts in a morecoherent fashion than we presently use on howfederal pay and benefits compare with those in theprivate sector. If the facts confirm what I suspect,we will need to do more to convince the Americanpeople, through the Congress and federal employ-ees, that they are, in fact, getting good value foreach dollar spent on the federal work force. And wealso will look for ways that we may need to improveour pay and/or benefits in order to remain competi-tive with the private sector.

The federal government does offer someexcellent benefits. The best example is our federalemployees health benefits program (FEHBP). Thisis among the finest of its kind in the world. Ouradministrative overhead manages just under4 million contracts. Its administrative costs arerather low, as fewer than 150 people are managingthe entire program. And its customer service ratingis extraordinarily high. In recent years, we haveused technology to provide better service with lesscost and with fewer people. That is the intent ofgovernment downsizing. While we are all familiarwith automatic phone systems, we find that theyserve our federal employees very well. Informationthat once required an exchange of letters or a longwait on the telephone now can be given and re-ceived in seconds. That also becomes a fringebenefit to a number of people who make changes ona regular basis because of our program openseason. In our current health care open season, for

36


example, OPM received 123,000 calls through itsautomatic phone system, called Open SeasonExpress. Of these, 85 percent received service by aninteractive voice response. The remaining 17,000,about 15 percent, of the customers were helped by acustomer service representative. The average timethe customer waited for a customer service repre-sentative was 17 seconds.

■ ConclusionIn these and many other ways, our government isperforming better than it ever has with fewerpeople. I am proud of the progress made, and Ithink you would agree that we certainly deservethe best civil service in the world. To have it, wemust be competitive with the finest private employ-ers. So when we ask how key employees can beretained, good pay and benefits are obvious, butthere also is pride in serving one’s country. Thepsychological aspects in pay are still there, andpart of that whole thing is a sense of caring.

37

Chapter 7

7The Gradual Erosion of Employment-BasedBenefitsby Robert D. Reischauer

■ IntroductionThe design and role of employer-sponsored benefitshave changed gradually over the past decade. Therecent trends are likely to continue because theforces driving them will, if anything, intensify inthe future. The nature of these forces suggests thatthere may be significant limitations to what publicpolicy can do to alter the trends, which are trou-bling from both the workers’ and society’s perspec-tives.

The slow but steady reduction that hasoccurred over the past decade in the prevalence andadequacy of employer-provided benefits is likely tocontinue in the future. There won’t be a rapidunraveling of the current benefit system, but therewill be a gradual erosion. The best way to under-stand why this will occur is to explore the circum-stances under which it makes sense—or is advanta-geous from both the employees’ and employers’perspectives—to obtain benefits through the workplace and to examine how these circumstances arelikely to change in the future.

At the outset, it is worth noting that thecurrent system of getting certain services throughone’s employer is rather unusual. Most goods andservices are obtained through individual, privatemarket transactions or by having the governmentprovide them collectively. In the rest of the world,work place provision of services has flourished onlyin countries where markets and government havefailed. This was the case in the former SovietUnion, where large employers often providededucational services, housing, child care, specialstores, sports facilities, and health clinics for theiremployees. Similarly, firms in some developingeconomies provide many services because govern-ment is weak and corrupt and private markets for

the services have not yet emerged. But the UnitedStates has the world’s most highly developedprivate market system and a public sector thatcertainly ranks among the best. So why do Ameri-cans obtain important benefit through their workplaces?

■ Seven Conditions That Supportthe System of Employment-Based Benefits

There are at least seven conditions that playimportant roles in determining whether benefitsprovided through the work place make economicand social sense and are acceptable to both workersand employers. First, such services make sense ifthe employer’s work force is relatively homoge-neous—in other words, if all workers find them-selves needing the same types of services in roughlythe same amounts and the costs of providing theservices are roughly equal across the differentworkers at the firm. Over time, this condition hasbecome less and less reflective of the situationfacing most employers. More women have enteredthe labor force, more employees work part time,and the workers’ family situations have becomemore heterogeneous. The average employer’s workforce today has relatively more single, divorced,and childless workers and fewer male heads offamilies with dependent children than in the past.The ethnic diversity of the average employer’s workforce has also grown.

The period from the end of World War IIthrough the mid-1980s was an era of ignoranceabout benefits. Differences among workers didn’tmatter much because the inherent inequities of thebenefit systems were not widely appreciated

38


outside the offices of benefit managers, and mostworkers viewed benefits as pure additions to theirwages. Over the past decade, however, workershave become more aware of both the costs ofbenefits and their unequal distribution acrossemployees. They are also beginning to understandthat benefits are an important component of totalcompensation and that it is total compensation, notjust cash wages, that employers care most about.Every dollar spent on employee benefits is one lessdollar available for cash compensation. The slowgrowth of wages in recent decades has heightenedworkers’ awareness of this tradeoff.

In an effort to impress upon workers thesignificant amounts they are devoting to employeebenefits, many employers have begun to provideeach of their employees with an annual statementof the amount they spend on the employee’s ben-efits. This has tended to heighten awareness of theinequities and undermine support for benefitsamong some workers. For example, when myresearch assistant and I compared our statements,she was not overjoyed to find out that our employerprovided a $3,700 annual subsidy for my healthinsurance while providing her a subsidy of only$1,900. Of course, even these figures didn’t reflectthe true disparity. They were based on the averagepremium costs of the different health plans wejoined and on our different family situations. Theydidn’t reflect the full effect that our different ageshad on the premiums paid by our employer. Inshort, support for employment-based benefitsamong workers in firms with heterogeneous workforces is likely to erode as the costs of these benefitsbecome more transparent to workers.

Second, employment-based services makesense when workers expect to spend a long timewith a single employer or expect to move amongemployers that offer similar benefit packages. Thisis important because the value of some employeebenefits varies greatly with age. Health, disability,and life insurance are the most obvious examples.Viewed from the perspective of a single year,employer-subsidized health insurance is a highlyinequitable salary supplement, one that has verylittle value to the average single 27-year-old malebut a tremendous value to a 55-year-old male withdependent children and high cholesterol. If the 27-year-old had some assurance that, if he wanted, hecould be employed by the same firm or a firm with

similar benefits when he is age 55, the inequityexperienced when he was young wouldn’t be thatimportant because he would realize that therewould be some rough equity over his working life.

There is a good deal of controversy amonganalysts about whether today’s workers are experi-encing more, less, or the same amount of tenurewith their employers. One does not need a defini-tive answer to this question to conclude that theenvironment is probably getting a bit lessconducive to employment-based benefits each year.Most workers will have a number of differentemployers over their working careers, several afterthey are 35 years old. And the benefit packagesoffered by different employers are probablybecoming more disparate. In addition, the types ofthe employer-employee relationships that anemployee might face are becoming more heteroge-neous. There has been a proliferation of part-time,flex-time, contingent, and consultancyarrangements, which affect the worker’s eligibilityfor benefits.

Third, employment-based employeebenefits make sense and are desirable when theyare tax subsidized; in other words, when the servicecan be obtained by workers at a cut-rate price ifthey are purchased at the work place throughexplicit or implicit reductions in cash compensa-tion. Even though the value of these benefits to theaverage worker may be less than the costs faced bytheir employers, the tax savings make the benefitworthwhile from the employees’ perspective.

But this advantage is becoming less andless important for a variety of reasons. First,marginal tax rates for most workers are quite low—15 percent—which reduces the tax savings. Second,public policy changes have created alternative tax-advantaged ways of buying these same servicesoutside of an employment situation. The mostobvious example of this is the tax-free retirementsavings opportunities afforded most workersthrough individual retirement accounts (IRAs).Policymakers expanded these opportunities in theTaxpayer Relief Act of 1997 with the Roth IRA.Similar developments are under way in the healthinsurance area, where recent legislation hasexpanded the fraction of health insurance premi-ums that the self-employed can deduct from theirtaxable income. If the nation were ever to move to aconsumption tax, the tax advantage afforded to

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emploment-based benefits would be eliminated.In summary, tax policy changes adopted to

achieve other worthwhile objectives are slowly butsteadily undermining one important reason whyemployment-based benefits have been so attractive.With these changes, the attractiveness ofemployment-based benefits has been reduced forthose in the bottom half of the income distribution.

Fourth, employment-based employeebenefits make sense and are desirable in situationsin which risk needs to be shared and in circum-stances in which moral hazard problems wouldarise if the services were purchased by individuals.These are major reasons why work place-basedhealth, disability, and life insurance have been sopopular. In each of these situations risk has to beshared. The work place constitutes a sensiblegrouping across which to share the risk because itis a closed group of basically healthy people whohave been brought together for purposes other thantheir need for insurance. When such insurance issold and purchased on an individual basis, thosewho are very healthy or young will refrain frombuying insurance and, instead, self-insure. Thosewith chronic conditions, the sick, those anticipatingthe need for expensive medical care, and the oldwill seek coverage. In short, there will be adverserisk selection that will push up insurance costs.

Unfortunately, the moral hazard problemsof the individual insurance market are beginning toinfect the environment in which employment-basedbenefits operate. With cafeteria plans and similararrangements, some of the collective risk sharing ofwork-place benefits has begun to disappear. Thosewho are very healthy might decide to opt out oftheir employer’s health insurance plan, choosinginstead added retirement contributions or someother employee benefit from which they mightexpect to gain more. In addition, because manyworkers are part of a family unit with severalworkers, they may be able to obtain health insur-ance coverage through a spouse’s employer, therebyescaping from sharing risk when their employer’sgroup has high costs. As employers shift more ofthe total premium costs onto workers, theseresponses will become more prevalent.

Fifth, employment-based benefits makesense when collective purchasing of the service isefficient and society has decided that the serviceshouldn’t be purchased collectively through the

government. Clearly, group purchasing of health,life, and disability insurance is efficient because itreduces marketing costs. Employers are also anefficient group to use to obtain these servicesbecause they can minimize the carrier’s billingcosts by ensuring timely and assured premiumpayments. Similarly, employers are an efficiententity through which pension benefits can beobtained because they can offer investment diversi-fication that, until recently, was not available toindividuals and because administrative and record-keeping costs can be kept down.

In today’s world—with computers, theproliferation of mutual funds, the creation of theadministrative structures for IRAs and 401(k)plans, automatic electronic bank transfers forrecurring bills such as monthly premium payments,and the emergence of health insurance purchasingcooperatives (HIPCs)—the advantages of the workplace as the efficient group purchaser are beginningto diminish.

Sixth, employment-based benefits makesense when they do not impose high administrativeand human resource costs on the employers. Overthe years, these costs have risen as governmentregulations have increasingly constrained theflexibility of employers and expanded reportingrequirements. The government regulations havebeen aimed at ensuring more equity in the distribu-tion of benefits and more assurance that theemployee will receive the benefits he or she hasbeen promised. There is every reason to expect thatthe costs of regulation will continue to trend up.

A seventh condition that makes it advanta-geous for an employer to offer benefits is whenthese forms of compensation can be used to attractand retain good workers. While benefits are stillimportant in this respect, their power is less than itonce was. The Employee Retirement IncomeSecurity Act’s (ERISA’s) vesting rules for pensionbenefits and the spread of defined-contributionpension plans mean that workers now are less tiedto their employers by pension plans. The Consoli-dated Omnibus Budget Reconciliation Act of 1985(COBRA) has given workers a bit more flexibilitywith respect to health insurance. Finally, with thespread of two-worker families, many can obtaintheir health benefits through a spouse.

This list could go on, but the point has beenmade that many of the factors that have made

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employment-based benefits so popular and sensiblein the past are beginning to weaken, if only verygradually. Over the course of the next few decades,the generosity of the benefits that employers offeris likely to decline, albeit very slowly. This declinecould manifest itself through an expansion ofindividualized benefits that involve less risksharing and redistribution. Little of the change willprobably take place through explicit modificationsin the benefit policies of existing firms. Rather,most of the change will come about as the benefitsprovided by new firms and those undergoingmergers are less generous than those of existingfirms, firms that go bankrupt, and firms thatshrink in size.

■ The Public Policy ResponseThese trends will put pressure on policymakers torespond because the benefits now provided throughemployers are vital to society. Public policy canrespond in one of three ways, each of which has itsown problems. First, policy can try to fill the cracksas they emerge, that is, develop mechanisms thatprovide these services to those who can no longeraccess them through their employers. We havealready seen this response in the health insurancearea, where programs have been developed toprovide health insurance to low-income childrenwho lack coverage and in the pension area withtax-favored IRAs. President Clinton’s proposal toallow early retirees and older workers withoutemployment-based health insurance to buy intoMedicare is another example.

The problem with this approach, of course,is that it may actually hasten the erosion ofemployment-based benefits; government programsmay act to crowd out employment-based benefits.New firms will feel less need to provide theseservices, and workers will be less concerned aboutjoining a firm that doesn’t offer them because theywill have other affordable ways to access thesebenefits.

A second response is to have public policyattempt to shore up the current system ofemployment-based benefits. This can be pursuedthrough rhetorical encouragement or tangiblecarrots and sticks. Carrots could take the form ofincreased incentives for businesses to provide suchbenefits. They would most likely take the form of

tax incentives and regulatory relief. Budget con-straints make the former difficult, while workeropposition could make the latter approach problem-atic. Sticks might encompass mandates. The nationwent through a recent test of the political viabilityof such mandates with President Clinton’s 1994health reform initiative. Its fate suggests that thisapproach doesn’t have much political appeal.The carrot approach probably would turn out to berather inefficient and inequitable. Most of thebenefits of the incentives would be scarfed up bybig firms that currently provide benefits and arenot about to scale back their efforts. Governmentcould focus its initiatives on small firms thatgenerally don’t offer benefits by creating conditionsthat made it easier and less expensive for smalleremployers to offer benefits. HIPCs are one exampleof this; the President’s 1999 budget proposalsrelating to small employer pension benefits areanother. But there are limits to how much could beaccomplished through such mechanisms because ofthe seven forces that were discussed previously.

The third possible policy response to theerosion of employment-based benefits would be tohave government collectivize the services that arecurrently being provided, in a patchy way, throughemployers. Any observer of the American politicalscene realizes that there is virtually no chance thatthis response will occur. Many probably believethat such a policy outcome could only arise from acollectivist movement. But it could equally wellspring from extreme forms of privatization. Forexample, a privatized Social Security system whichallowed for voluntary supplemental individualdeposits could be a fertile incubator. With such astructure, employment-based retirement programscould gradually disappear as employers scrappedtheir pension plans in favor of salary supplements,which their workers could, if they wanted, depositin their individual accounts. A similar policyevolution in the health care area could be imaginedif the dominant form of coverage became MedicalSaving Accounts backed up by catastrophic insur-ance.

■ ConclusionOver the course of the next few decades, economicand social forces will continue to weaken therationales for employment-based benefits. As a

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result, there is likely to be a very slow decline inthe fraction of the work force that enjoys thesebenefits as well as in the adequacy of those benefitsthat are provided. Acting out of good intentions,

government will try to fill in the cracks in thesystem as they develop. However, these policies arelikely to make the underlying problem marginallyworse.

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8Employers Need to Make the Case forEmployee Benefitsby James A. Klein

■ IntroductionTo be a little bit provocative, I would like to addressmyself to questioning somewhat the premise of thequestion I was given to comment upon: “Do Em-ployers and Employees Still Need EmployeeBenefits?”

Perhaps the answer should be “maybe,” orperhaps even “no.” I want to underscore that, myown personal answer is a very vigorous “yes.” Butbecause of some of the trends that I see developingamong public policymakers and others, I think thatwe, as a benefits community, have a much tougherresponsibility to, first of all, step back and questionwhether the answer is necessarily a “yes,” and thento make the most articulate case we can as to whyit should be.

In doing so, let me start by citing two veryunscientific observations or stories. In Washingtonit is said that one story is an anecdote, two storiesare data, and three stories are a survey. So let meshare two stories with you.

The first is, back in 1985, I was working atthe U.S. Chamber of Commerce as the lobbyist onemployee benefit issues. This was right at the verybeginning of the debate over what became the TaxReform Act of 1986. The president of the U.S.Chamber of Commerce at the time sent out a letterto all of the CEOs of the Fortune 500 companiesthat were members of the Chamber, as he did onmany different topics over the years. He askedthem what they, as CEOs of their organizations,thought about the then-emerging proposals to limitin some fashion the tax exclusion to employees foremployer-provided health care benefits.

The responses came back, almost unani-mously, that any limit on employees’ tax exclusionfor employer-provided health care would be adisaster. The CEOs said that their employees relied

on these benefits fundamentally and that they werean important part of what their companies weredoing in terms of providing guarantees and protec-tions for their work force and creating an environ-ment that they wanted to promote.

I only tell this story now because I think,for a variety of reasons, that different people mightinterpret the issue differently, and I can’t imagineany of us expecting the same degree of near unani-mous response were CEOs of Fortune 500 compa-nies to be asked that same question today. And it isa question that they might be asked in the not-too-distant future if we are about to embark upon arigorous national debate on comprehensive reformof the tax system.

The second story is one that goes a bit moredirectly to the heart of interactions that we havehad with members of Congress and their represen-tatives on these issues. And it includes commentsthat I’ve heard directly from two congressionalleaders on health care over the last year-and-a-halfor so. One of the leaders is Congressman DennisHastert (R-IL) and the other is Sen. Robert Bennett(R-UT). These lawmakers have chaired House andSenate task forces on health care. They havequestioned whether the provision of health carebenefits should be decoupled from the employmentrelationship.

I want to emphasize that these are twomembers of Congress who are very pro-businessoriented; we go to them on a regular basis forsupport when issues arise, and they provide thatsupport. In every respect, they want to ensure thatthe sponsorship of benefit plans is not encumberedin any way by mandate or overregulation. Nonethe-less, I think, what I read from their very sincerecomments is that, notwithstanding their role asstrong supporters of the current system, a part oftheir thinking questions the value added by


44

employers sponsoring benefits. If our champions inCongress can call into question the very notion ofwhether employers ought to be involved in thiswhole benefits business, then all of us, butcertainly a group like mine whose job it is to be anadvocate for benefits, have to point out the valueadded by employer involvement.

■ The Current SystemReturning to the question of whether “yes” is theright answer to the question posed, we also have toacknowledge some of the current system’s weak-nesses. We have to acknowledge that, despite theenormous tax expenditures associated withemployment-based health care and retirementbenefits, there still are millions of Americans whoare uncovered. This helps to explain why there is acertain attractiveness in a philosophy that says,“Maybe this really ought to be turned over toindividuals. Maybe we should simply have somekind of a super individual retirement account toallow folks to take care of their retirement needsand a super medical savings account to allow folksto address their health security needs.”

I think that the challenge for the benefitscommunity is to point out the false dichotomy of thestatement that these kinds of health and retire-ment protections could be as ably presentedthrough a strictly “individualized” approach asthrough an “employer-group sponsored” approach.

We need to take the argument beyondmerely saying, “Oh, but look at all that employersdo in terms of sponsoring the benefit, paying theadministrative fees, and taking on certain fiduciaryresponsibilities in the retirement context.” Or, onthe health care side, we need to go beyond saying,“Oh, but employers can purchase health benefits somuch more effectively on behalf of a group thanindividuals would be able to do on their own.” All ofthese points are true. But, alone, they are notsufficient to make our case convincingly.

Instead, we need to educate policymakersand other thinkers who are leading this “indi-vidual” versus “employer” dialogue to the notionthat one of the greatest values of the employer-sponsored system is the extent to which it helpsindividuals to be more prudent purchasers andconsumers of benefits. The real value added whenemployers sponsor retirement benefits for their

employees is not just all the expense that you incur,and the efforts you undertake on behalf of youremployees, it’s what you do in terms of gettingpeople to think about being good savers and theretirement savings education efforts that youundertake on behalf of those employees.

On the health care side, it’s not just thatyou’re able to purchase benefits so much moreeffectively for your employees than they could ontheir own, which is true. It’s that by selecting somechoices for them, you’re helping them be prudentconsumers. In short, employer sponsorship doesnot supplant the individual’s role in his or herhealth care or retirement decision—it encouragesit.

I don’t know if you agree or not, but if it issomething with which you agree, I can tell you it iscompletely lost on most of the policymakers inCongress. Congressman Earl Pomeroy is theexception, not the rule.

■ ConclusionTo conclude, and also so as not to leave a com-pletely doom and gloom message, on the healthcare side, I don’t see much reason for optimism, butI do see some reasons for optimism on the retire-ment policy side.

In the health care arena, if you look at theattacks to which the Employee Retirement IncomeSecurity Act of 1974 (ERISA) is being subjected,you will note that all of the various mandatedbenefit proposals, and other actions on the part ofthe Congress to essentially step into the shoes ofcompany employee benefit managers who designbenefit plans, are requirements that are onlyapplicable to those who voluntarily engage in thesystem. Those employers who choose to be outsidethat system, of course, don’t bear any burden. Theaddition of mandates only makes the sponsorship ofhealth plans further out of reach for those whowant to sponsor benefits but cannot afford to do so.

At the very same time that legislation isemerging from Congress that makes the sponsor-ship of health plans more difficult, ironically,Congress, with respect to its sponsorship of publicprograms such as Medicare, is finally beginning toemulate private employers in terms of adding someelements of managed care to the public programsthemselves.

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On the retirement side, while there cer-tainly is legislative movement toward increasingfiduciary employers’ liabilities, and thereby makingit somewhat less attractive for employers to spon-sor plans, there is also an appreciation of the needfor greater retirement savings. This manifests itselfin the form of bipartisan legislation to simplify thesponsorship of retirement plans and in policies thatseek to encourage employers to provide retirementinvestment education.

My last comment is that, in the finalanalysis, I think it’s important to be engaged inthese issues. It is important not just because of theneed for policymakers to be better informed aboutthe value added by what employers are doing. It isalso that, ultimately, employers will pay for ben-efits one way or the other. I think perhaps Con-gressman Pomeroy was alluding somewhat to thatpoint.1

1 See Congressman Earl Pomeroy, “A CongressionalView: The Case for Employment-Based Benefits,” inthis volume.

Benefits will be provided either through apublic program or through some kind of require-ments to provide the money to the individuals andthen create the vehicles to allow them to run thoseplans essentially on their own.

And it comes down to, then, a question oftrust or confidence on our part, as an employercommunity. The issue is, if you’re going to pay theprice one way or the other, through taxes to supporta public plan, through greater amounts of cash thatwill be paid to individuals, allowing them tooperate on their own, or through the current basicstructure of the employment-based benefits system,which way will accord the greatest degree of controlfor these costs and for the way these plans aremanaged?

I believe that the greatest degree of controlwill be experienced through employment-basedsystems. And accordingly, we will have gotten to anemphatic “yes”: We need employee benefits.

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9Pension Issues as Viewed by the PensionBenefit Guaranty Corporationby David M. Strauss

■ IntroductionI welcome this opportunity to discuss thegovernment’s role regarding employee benefits,particularly retirement benefits. I can assure youthat a strong and secure pension system is gettingclose attention.

The challenge we face in helping Americanworkers achieve financial security in retirement isthe subject of many governmental meetings.Included is the National Economic Council processat the White House, where three of my co-workersfrom the Pension Benefit Guaranty Corporation(PBGC) are involved in a group of about 30 who aremeeting on pension initiatives. Almost every day,there are meetings with administration officialsand officials on Capitol Hill, and there areinterdepartmental meetings. So, certainlyretirement security, or retirement benefits, are oneveryone’s short list of issues regardless of wherethey are in the government.

■ Meeting the ChallengesIn terms of the role of PBGC and how it relates tothis process, we have our own uniqueresponsibilities and certainly are a player in termsof some of the bigger issues, but we also are takingthese specific steps to meet these challenges. First,we are trying to be more responsible to the needs ofemployers who actually offer the defined benefit(DB) plans that we insure. Second, we are makingefforts to restore confidence in the federal pensioninsurance system by keeping PBGC solvent. Third,we are taking very seriously our mandate underthe Employee Retirement Income Security Act(ERISA) to encourage the use of DB pension plansas the primary provider of retirement income.

With respect to the first point, we aretrying to develop new ways to work cooperatively

with employers who actually provide the plans thatwe insure. PBGC has done a tremendous job interms of relating to participants, workers, andretirees who receive benefits from the plans that wehave trusteed. We have corporate rules dealingwith customer service for participants. Forexample, calls are responded to within 24 hours,letters have to be answered within five days. Wehave tried to take the principles of a customer-driven organization and do a better job of workingwith our plan sponsors to find out what they wantso we can do a better job of focusing on theirconcerns as one of our ways of helping them provideretirement benefits. As a result, we are developingbetter mechanisms for two-way communication.

■ The Virtual Town HallIn my first week at PBGC, I attempted to visitevery employee—we have about 10 floors in abuilding in Washington, DC— in his or her ownoffice. It took me the better part of four days, and Iam sure that some were probably betting that Iwould never get through it. But at the end of thefirst week, I sent an e-mail to all of our employeesin an attempt to establish a virtual town hall withthem. I was surprised that I got about 100responses. I thought the concept worked prettywell, and started talking to some of the organiza-tions that represent our large premium payers andsetting up virtual town halls with them and withsome of the other important pension professionalswho use our services at PBGC.

This virtual town hall works very well as away of establishing two-way communication, andthere are probably thousands of people who nowhave my e-mail address. From my meetings withbig premium payers, different societies of actuaries,and participant meetings that we conduct when we

Do Employers/Employee Still Need Employee Benefits?

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trustee new plans, I have received a lot of usefulinput. Some concerns have been raised to medirectly about regulations that people findirritating, and we have made a significant numberof changes based on some of the direct feedback Ireceived. Creating an atmosphere where we haveeffective two-way communication with ourinvoluntary customers, those who are forced to payour premiums and who have to deal with ourvarious regulatory schemes, has been extremelyhelpful in creating a better partnership to tacklesome of the bigger challenges.

To the extent that we are listening moreeffectively, we have been able to make a number ofchanges while still carrying out our mandate toprotect workers’ pensions and the pensioninsurance program. For example, one of the firstdecisions I made was to retire our Top 50underfunded pensions list. This was a majorirritant for our biggest premium payers because wewere measuring pension underfunding, rather thanthe funded ratio of these pension plans. We weresingling out companies that were meeting orexceeding all of the legal requirements. When welooked at this more carefully, we were singling outcompanies that did not pose any risk either to theparticipants in those plans or to PBGC. And so wewere able to make a major change in that respect.

■ Minimizing Red TapeWe also made a number of changes with respect toeasing administrative and regulatoryrequirements. For example, in a meeting with theChamber of Commerce Qualified PlanSubcommitee, we discovered that our premiumaudit program wasn’t really working. We haddesigned it to be a compliance program, but thoseon the receiving end viewed it as something with apunitive intent. As a result of these discussions, wedeveloped much less obtrusive ways of dealing withpremium audits. In some cases, it was costing moreto comply with the premium audit program thanthe actual premium. This is one example of findinga win/win way to ensure that premium obligationsare going to be met but doing it in a way that doesnot create nearly as many problems for thepremium payers.

Another program under development is avoluntary self-review program as an option forpremium compliance review. Plan sponsors that opt

for this program will be able to self-identify anyunderpayments, correct them, and thereby avoidpenalty charges. We have changes with respect todifferent reporting requirements, and we haveongoing discussions concerning how PBGCcalculates pension underfunding. But the goal is tochange the whole psychology with respect to howwe deal with the companies and the entities thatactually provide the pension plans so we play amuch more supportive role and forge more of acooperative relationship.

The second area of our focus is to ensurethat the pension insurance system remains solventso that workers and employees have confidence inthe system. As recently as 1992, there were direheadlines in the New York Times reporting that thefederal government’s pension insurance agency wasgoing to become the next savings and loan debacle.It wasn’t until last year that, for the first time, wereported a positive balance, and we are going to bein the black again. The fundamental importance ofa sound pension insurance system will require us tobe prudent when considering anything that mightundermine its security. After 20 years of deficits, weobviously are going to continue to be very cautiousin every respect, especially when you consider thatthere are going to be changes in our variable ratepremiums, already scheduled in the law, that couldreduce payments for the variable rate to as low asone-quarter to one-third of what they are today. Sofocusing on maintaining solvency and confidence inthe pension insurance program remains a criticalgoal.

■ The ERISA MandateThe third point involves our ERISA mandate topromote DB pension plans. We are trying to set upcooperative arrangements in which both workersand employers take a new look at DB plans andunderstand the major role they can play inproviding American workers with a more secureretirement. We are all very familiar with thestatistics and the significant decline of DB plansinsured by PBGC. At our high-water mark, about1980, there were about 112,000 of these plans. Weare at about 50,000 today. This is due primarily to alarge number of terminations of smaller plans.

We are well aware of the many reasonsthat have been suggested for the decline in DBplans: the changes in the economy, the changing

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nature of the work force and the work place, thestatutory and regulatory requirements, and thelack of understanding on the part of some workersregarding meaningful differences between DBplans and other retirement saving mechanisms.

■ ConclusionAs the agency that insures DB pension plans, wecan do two things to expand DB coverage. The firstis to work with all of our counterparts in theadministration, including the Labor and TreasuryDepartments, to examine the laws and regulationsthat affect pension plans. By eliminatingburdensome and unnecessary obstacles, we canencourage wider pension coverage. We also aretalking to actuaries and other pension professionals

about different types of DB plans that are moreappropriate for today’s worker, especially in smallbusinesses, where fewer than 25 percent of smallbusiness workers are covered by any kind ofretirement program. Even if DB plans only play aniche role among smaller employers, we want tomake sure that there is some sort of DB vehiclethere so DB plans do not vanish from the smallemployer market.

The second area in which PBGC can havean influence is by doing a better job of informingand educating both workers and employers aboutthe benefits of DB plans. We are trying to usePBGC as a bully pulpit to focus attention on theneed for retirement security overall and for DBplans in particular.

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10A Congressional View: The Casefor Employment-Based Benefitsby Congressman Earl Pomeroy

■ IntroductionThe public policy take on future trends in privateemployee benefits administration comes down tothis: The workplace has been the central and mostimportant distribution point for essentialcoverages, most particularly health and retirement.To the extent that future trends point to a reducedprivate sector commitment in this area, pressurewill build for a public augmentation of employeebenefits.

Ultimately, if we have a clear trend towardthe reduction of critical benefits by the privatesector, we will come to a point down the road wherecritical mass is reached in terms of the pressure fora public program. The result: brave newgovernment programs. For employers, then, theupshot is a pay-me-now or pay-me-laterproposition. I believe the existing employment-based structure offers some very distinctadvantages to employers that make it well worththeir while to continue the private provision ofbenefits.

■ An Erosion of Private BenefitsFirst, let us consider whether current trendssubstantiate the notion that there is an inevitableerosion of the private provision of benefits. I thinkthe evidence is mixed in the large, organizedemployers. In some cases, there clearly is noerosion of benefits and, in fact, there are new andcreative benefits. These may be more cost-effectivebenefits, and businesses may be capping theiroutside exposure in certain ways, but in terms ofthe benefit relationship, it is very much intact.

In terms of other sectors, the results aremore mixed. This is particularly important becausemuch of the growth of employment opportunities inthe country is not occurring among large employers

with organized work forces but in small employersthat lack unions and in the service sector. Benefitprovision traditionally has been much lower in boththese sectors. I expect the statistics through 1997would continue much like the data from 1987through 1992, with about 17 million new jobs incompanies employing under 100 and 5.1 millionnew jobs in companies employing under 1,000.Thus, more than three times as many new jobs arebeing created in the smaller employer environment.

For example, about 78 percent of thosecompanies employing more than 1,000 workersprovide retirement benefits, while only 24 percentof those employing less than 100 and 13 percent ofthose employing less than 20 provide retirementbenefits. In North Dakota, there are manyemployers with fewer than 20 employees. And soyou see that the fall-off of benefits is very dramaticand substantiates what we would tend to think ishappening—that the smaller the employer, the lesslikelihood of benefits. Yet, at the same time, a lot ofnew job creation is occurring in the small employersegment.

■ Financial Pressure and theErosion of Benefits

To some extent, many of the new jobs in the smallbusiness sector are due to outsourcing from largeremployers, largely because new hires have becometoo expensive and outsourcing has become morecost-effective. So there is definite financial pressurecontributing to the erosion of benefits. In terms ofthe types of benefits provided, it may be that asignificant cost share is being assumed byemployees in their health benefits, not just throughlarger deductibles but also through significant co-pays, and even through premium sharing orrestricting benefits to workers only, leaving


52

employees to pick up the rest of the expense for thefamily premium.

In the area of retirement benefits, ofcourse, the titanic shift from defined benefit todefined contribution plans shifts the risk to theemployee and reduces the relative contribution ofemployers. Thus, even where benefits are provided,there is significant indication that the benefit ismuch less generous than previously and that muchmore responsibility has been shifted to theemployee, both in terms of cost and in terms ofactual administrative responsibility.

■ The Positive Effect of EmployeeBenefits

There are some very significant, positive reasonsfor employers to continue providing benefits. I amabsolutely convinced that the employer/employeerelationship is best served in an atmosphere ofshared interest—a community within a workforce—where employees and employers are aspiringto the same goals. The employee is contributing tothe employer, and the employer is contributing tothe employee, not just in terms of salary on apiecemeal basis but rather in terms of arelationship. Although we have moved away fromthe paternalistic relationship of the past andemployees no longer want that anyway, the notionof a relationship remains important. And in today’sworld, the employment relationship may be thesteadiest of all relationships the employeeencounters.

There is a fascinating book that draws onstatistics of modern life—Bowling Alone—whichshows bowling at all-time high and leagueattendance at all-time low. The book dramaticallydemonstrates the loss of community in our society.With divorce rates of more than 50 percent, we areactually seeing that the employment relationshipmay supplant the family relationship in terms of itsreliability for a certain number of people in thework force today. This is very important. Whenpeople are searching for community, to the extentthat an employer can create a sense ofcommunity—with benefits being an important partof the strategy—it will inure to the employerbenefit.

Second, the ways in which financialincentives are structured give employers some

wonderful advantages. Tax deductibility translatesinto a cost share: Employers provide the benefits,and government helps pay for them because oftaxes that otherwise would be owed. That gives theemployer virtually all of the benefit. The employeesunderstand that benefits come from their employer,and employers have broad discretion in terms ofhow those benefits are structured. Thus substantialbenefits for employers accrue from the existingstructure.

Additionally, some distinctly negativeconsequences might result for employers if the layof the land were to change and benefit provisioneroded over time. First, there would be reducedsupport for the existing statutory and tax structurethat presently supports the employee benefitssystem. Interestingly enough, there is no safequarter in terms of the political parties. You willsee the threat to employee benefits in theRepublican party primarily manifested by sweepingtax reform. While reform would simplify the taxcode, it would wipe out a large number of taxexpenditures that presently support the employeebenefits system. In short, tax breaks now enjoyedby businesses to provide benefits to their employeeswould be eliminated. Basically, if the provision ofemployee benefits continues to change, we elevatethe risk of sweeping tax reform that would wipe outexisting tax preferences.

On the Democratic side, there is a loss ofenthusiasm for the Employee Retirement IncomeSecurity Act (ERISA) to the extent that Democratsever viewed the ERISA regime with enthusiasm. Byand large, the ERISA regime has been largelyintact since 1974, and represents a bargain struckby the employment community and the governmentthat employers provide the benefits and thegovernment allows it to be done across state linesin a fairly deregulated environment. As erosion inemployee benefits occurs, a loss of confidence andfaith in the ERISA deal will invite increased callsfrom Democrats to aggressively regulate areas thathave not previously been regulated under ERISA.In the year ahead, look for very substantial calls—probably coming from the president himself—for anew federal regulatory role relative to managedcare, such as certain quality assurances inmanaged care plans. Thus, what businesses mayface, on the tax side and on the regulatory side, allare to the disadvantage of employers. In addition,

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Chapter 10

you would see growing public support for publicprograms when it is viewed that private programsare no longer getting the job done.

For example, when the Clinton health planwas being discussed and debated, I sent out aquestionnaire to everyone I represented in NorthDakota. It consisted simply of some open questionssuch as “Do you have coverage?” and “What do youthink of it?” I received about 10,000 responses,which is quite good. I expected people who reallyhad an axe to grind with the existing health caresystem to self-select, and, mad as hell, tell meabout it. To the contrary, 70 percent of therespondents had coverage and most were satisfiedwith it. I concluded that the administration shouldhave done some more testing before they rolled outtheir plan. We did not have critical mass for asweeping overhaul of the health care system. Mostpeople had private benefits and were satisfied withthem. Again, as that satisfaction erodes, theconcomitant opportunity to enact new publicprograms will arise. Employers will then be leftwith the expense of the public program but not theability to individually tailor benefits or reap therewards within their work place of providingprivate benefits. That is why I believe there aresubstantial positive consequences for employers ofproviding benefits and substantial negativeconsequences that will befall employers if privatebenefit provision continues to erode.

■ The Future of BenefitsWhat does the future hold? I believe it depends oncorporate America understanding that goodcorporate policy runs parallel with good publicpolicy. To the extent that business attempts to takea shortcut, there will be a reconciliation down theroad, and ultimately good public policy will carrythe day. As employers reduce benefits, they willfind themselves carrying the cost of publicprograms at some point in the future.

The second thing that will determine theoutcome is congressional understanding that theprivate administration of benefits is a system thatis working. In light of the current political climate,as well as the financial stresses on our government,the current private benefits system is far and awaythe most cost-effective way to continue to providethe most good for the most people. As we talk abouttax reform or as we talk about regulatoryassurances, we should not break the fundamentalbargain that ERISA represents.

■ ConclusionFor several sessions of Congress, I havecosponsored legislation that would create aretirement savings commission to develop coherentnational strategy for facilitating private retirementsavings. Such a strategy certainly would emphasizethe substantial role of work place retirement plans,of which today we have a hodgepodge. While thiscommission legislation came close to passing lastCongress, it does not have the same level ofmomentum this time. But in the absence of acomprehensive strategy, we are pursuing efforts toaid small employers in bringing retirement planson line. We now have both parties kind of falling allover themselves trying to figure out how they canprovide some regulatory relief to the smallemployer, what else they can do, what new taxincentives they can provide. That was unthinkable,even four years ago. In short, it is positive that wemay not be getting it right, but at least we areworking at it. One provision that may have a solidchance of passing in the year ahead is a definedbenefit model called the SAFE (Secure Assets forEmployees) bill. It is similar to the savingsincentive match plan for employees (SIMPLE)legislation in its regulatory relief focus, and it mayhelp small employers. At a minimum, it may be aniche product. I for one am not prepared toabandon the defined benefit format for anyone,even in the small employer context.

55

Appendix A

APink Slips, Profits, and Paychecks:Corporate Citizenship in an Era of SmallerGovernmentby U.S. Secretary of Labor, Robert B. Reich

George Washington University School of Business and Public

Management, February 6, 1996

■ IntroductionIf the government is to do less, then the privatesector will have to do more. But the stunningannouncement on the first business day of l996that one of the nation’s largest and most profitablecompanies would permanently lay off tens ofthousands of employees raises profound questionsabout the private sector’s ability to take on moreresponsibility for Americans’ economic well-being.What may feel like a nightmare for the affectedworkers is, in fact, hailed as a dream-come-true onWall Street—suggesting that the company mayhave done exactly the right thing by itsshareholders. But that is precisely the issue.

Do companies have obligations beyond thebottom line? Do they owe anything to their work-ers, their workers’ families, and their communities?

Even some of the most orthodox defenders ofthe free market have said that movie studios,record companies, and television networks shouldforswear lewdness or violence, although panderingto audiences’ baser appetites would yield richprofits. The profit principle, it seems, is somethingshort of absolute. What, then, about a corporation’sduty to its employees, their families, and thecommunities in which they live? Might not thesudden loss of a paycheck be at least as damagingto family values as a titillating screen performance?

In fact, family values are intricately inter-twined with what might be called home economics.The necessity to work longer hours in order tomake ends meet may mean that a parent isn’thome when a child is in most need of parenting.The urgency of finding a new job may mean that

one spouse must move to another city, or mustcommute long distances, leaving family behind. Orit may require that an entire family uproot itselffrom friends and relatives. The financial pressuresresulting from a declining paycheck or the loss of ajob can disrupt and sometimes destroy families.Whether we like it or not—whether we recognize itor not—corporate decision-makers have significantinfluence over the future strength of America’sfamilies and communities.

Yet corporate executives protest, with somejustification, that they have no choice. They arguethat they must do what is in the interest of share-holders even at the expense of employees and thecommunities in which they live. If wages andbenefits can be cut without imperiling production,they must be cut. If employees’ efforts do notgenerate a sufficient return, the jobs have to go.And if an entire community loses its economic basebecause the company can do its work more effi-ciently elsewhere, then so be it. Managers who balkat executing the judgments of the market fear, withreason, that they will quickly face their own day ofreckoning.

Yet this restricted vision of stewardship isultimately disastrous for America—includingAmerican business. Corporate leaders must recon-sider.

This era of government downsizing is also atime for corporations to size up their responsibili-ties to America. As the President noted in his Stateof the Union address, employers must do their partalong with employees—sharing with workers thebenefits of the good years, not just the burdens ofthe bad. It is a time for companies to focus beyond


56

the bottom line. It is a time for a new corporatecitizenship.

I would like to address what such a reconsid-eration might entail. But first, a little perspectiveon how we reached this point.

■ The End of the Social CompactChief executives once sang a different tune. In al951 address that was typical of the era, FrankAbrams, chairman of Standard Oil of New Jersey,proclaimed, “The job of management is to maintainan equitable and working balance among theclaims of the various directly interested groups ...stockholders, employees, customers and the publicat large.” That same year, Fortune magazinelectured executives on their duty to be “industrialstatesmen” who worked for the good of theiremployees and communities as well asshareholders.

This implicit social compact among corpora-tions, their employees, and communities withwhich they dealt survived into the l960’s and l970’s.So long as the company earned healthy profits,employees could be assured of secure jobs withrising wages and benefits, and their communitiescould count on a steady tax base. When theeconomy turned sour, employees might be laid offfor a time. But when the economy revived, the workwould return. The very term “layoff” suggested atemporary separation.

The compact was enforced in several ways.Unions obviously played an important role. Therewas also a public expectation that when a companydid well, its employees and community would alsodo well. It would be unseemly —“un-American,” ifyou will—for a business not to share the benefits ofits success.

What has changed? For one thing, competi-tion. American businesses have been transformedfrom comfortable and stable rivals into bloodlettinggladiators. Information technologies have radicallyreduced the transaction time among suppliers,wholesalers, retailers, and customers. Airlines,telephone companies, utilities, common carriers—and Wall Street itself—have been deregulated.Global competitors threaten the very survival ofAmerican manufacturers. Entry barriers such aspreferential access to capital markets havedropped, allowing small companies to grab marketshare from big ones.

Today, vast amounts of capital can be movedfrom place to place at the push of a key on apersonal computer. Investors face an ever-widerarray of choices of where to put their money.

This “electronic capitalism” has replaced thegentlemanly investment system that had given“industrial statesmen” the discretion to balance theinterests of shareholders against those of employ-ees and communities. Now, any chief executive whohesitates to subordinate all else to maximizeshareholder returns risks trouble. By the sametoken, a chief executive who ruthlessly subordi-nates all else can reap handsome rewards. We arefaced with the spectacle of CEOs pocketing multi-million dollar bonuses and stock options afterabandoning their employees and communities—indeed, precisely because they have abandonedtheir employees and communities.

The social compact has come undone. Unionsare less able to enforce it. Public norms and expec-tations cannot sustain it. Profitable companies areshedding workers and they are leaving town. Eventhe term “layoff” no longer means what it used to.Most layoffs are now permanent. We need a newword to describe what the phenomenon. Perhapswe should call them not “layoffs” but “cast-offs.”

■ The Trap of the Old EconomyThis transformation of the corporation into theagent of the shareholder alone, and the consequentstranding of so many working people and theircommunities, is occurring at a particularly unfortu-nate time. Much of the American work force isfacing a stark challenge of adapting to new eco-nomic realities, just as sources of support inmeeting that challenge are quickly eroding.

The same explosion of technological changeand global integration that has intensified competi-tion among companies and expanded investors’options is also changing the nature of work. Themass-production jobs that were once the gatewaysto the middle class are being replaced by jobsrequiring technical or problem-solving skills andthe capacity to continuously acquire new skills. Theearnings of people who are poorly educated to beginwith, or who have outmoded skills, are declining.The earnings of those with good educations and theright skills are rising. The gap is widening rapidly.

Tens of millions of Americans remain trappedin the old economy. I have seen them and talked

57

Appendix A

with them across the nation. They are laid-off—cast-off—and jobless, or in new jobs with worsewages and benefits. In fact, most people who havelost their jobs in recent years and found new onesnever catch up with the earnings and benefits theyonce had.1 Or they have started out in a low-wagejob and cannot seem to get ahead no matter howhard they work. They cannot easily acquire on theirown the education and training needed to succeedin the new economy.

This is a problem for all of us, not just thebottom half of the workforce. Almost three quartersof our national output comes from people; only onequarter from machinery. The quality of our laborforce is the engine of economic growth; physicalcapital is the caboose. If a significant portion of theAmerican workforce lacks the skills to succeed inthe new economy, the standard of living of allAmericans is imperiled.

■ The ConsequenceThe corporation’s relentless focus on one goal—theexclusive goal of maximizing shareholder returns—makes it less willing or able to ease the transi-tion of the American workforce to the new economy.Were the old social compact still in effect, compa-nies would bring their workers along, and pay theextra freight. With the compact voided, even highlyprofitable companies now leave their workersbehind.

The narrow economic calculus discouragessuch investments: The nation as a whole may bebetter off when employers provide adequatepensions and decent health coverage and whenthey teach their workers basic or industry-wideskills beyond what is required to function effec-tively in their current job. The economy as a wholemay be more productive and flexible when employ-ers see to it that workers who are no longer neededget trained for and placed in new jobs. Yet becausethe company’s shareholders do not reap the fullbenefits of these sorts of investments, even themost enlightened Chief Executive Officer will beloathe to make them to the extent that societyneeds.

To be sure, some companies do take the “highroad” to higher profits—bringing employees alongwhile improving and enlarging their businesses andthus expanding their payrolls—rather than the lowroad of suppressing wages and paring payrolls. Andthe shareholders of these companies do perfectlywell. In fact, the long-term payoff from boostingworker loyalty and security and from retainingexperienced workers can exceed the more immedi-ate financial benefits of taking the “low road.”

Let me give you several examples of high-road companies. Just before last Christmas, a tragicfire destroyed the factory of Malden Mills inMethuen, Massachusetts, and with it the securityand the hopes of the 2,400 people who work there.Three days later, the owner of the firm, Mr. AaronFeuerstein, appeared before his employees and toldthem that he would not only rebuild and rehireevery one of them, but he would also continuepaying them their salaries and their benefits duringthe shutdown. Today, Malden Mills is well on itsway back to full operation.

Or consider another company—this onepublicly held. Corning, Inc., is ensuring its world-wide leadership in its diverse product line—fromhousewares to telecommunications—through acommitment to employee participation and training.The company has won the Malcolm BaldrigeNational Quality Award and has been recognized byWorking Mother magazine for providing a family-friendly work environment.

There are many other examples of high-roadcompanies—Xerox, Chrysler, Republic EngineeredSteels—to name only a few. But I wish there weremore. Unfortunately, the high road is the exceptionrather than the rule. In too many instances, topexecutives are not creating value; they are merelyredistributing income from employees and theircommunities to shareholders.

As corporations have focused more and moreexclusively on increasing shareholders’ returns, theconsequences have become obvious. The stockmarket has soared while pink slips have prolifer-ated, health care and pensions have been cut, andthe paychecks of most employees have gone no-where. Top executives, talented entrepreneurs, andWall Street intermediaries have never done as well.Workers without adequate education and skills, orwith outmoded skills, are in free fall. This situationis not sustainable. But what can be done about it?

1 Stevens, Ann Huff, “Long-term Effects of Job Dis-placement: Evidence from the Panel Study of IncomeDynamics,” NBER Working Paper #5343, November1995.


58

■ The Limits on the Public SectorHistorians looking back on this era will record thedouble irony. As noted, the transformation of thecorporation into the agent of the shareholder aloneis occurring at a time just when the Americanworkforce is in most need of help adapting to a neweconomic system. But it is also occurring just whenthe public sector is particularly constrained fromfilling the void. This administration came to officehobbled by more than a decade of exploding publicindebtedness. We had no choice but to make deficitreduction a first priority. Moreover, the public isincreasingly skeptical of the federal government’scapacity to run large programs. As the Presidentnoted in the State of the Union Address, “The era ofbig government is over.”

Regardless of how the current budget nego-tiations are settled, in the future the federalgovernment will have a more modest role insafeguarding the economic security of Americans.States and localities may have more leeway, inprinciple, but far fewer resources. And because theywill compete with other states and locales to attractcompanies, they will be reluctant to impose highertaxes or any other extra burdens.

To be sure, government can make moreeffective use of the resources it does have. We havealready taken steps to change the unemploymentinsurance system—designed to provide incomesupport during temporary layoffs—into a genuinere-employment system designed to move peoplerapidly into new jobs and get them the trainingthey need. Hopefully, Congress will heed thePresident’s call to consolidate federal job-trainingprograms into vouchers that unemployed or low-wage workers can use at community colleges ortechnical schools to get the skills they need. And wewant to make pensions and health insurance moreportable, so that they will move with people fromjob to job, and be available between jobs. TheAdministration strongly supports legislation nowpending before Congress that would bar healthinsurers from cancelling policies when a job is lost.

The President remains committed to educa-tion and job training. But even if we succeed inmaintaining current levels of funding in the face ofsevere budget constraints, it will not be nearlyenough. State and local governments acrossAmerica are paring back. Classrooms in too many

of our cities remain overcrowded. Tuition at toomany state universities and community colleges isrising faster than inflation. Vocational and techni-cal education is too often obsolete or woefullyinadequate to what the times demand. By oneestimate, merely to return to the level of inequalityat the end of the 1970s would require an additionalyearly public investment in the skills of the bottomhalf of our workforce of approximately $60 billion.2

It is a safe bet that funding of that magnitude willnot be forthcoming any time soon.

■ Corporate ResponsibilityRevisited

One ostensible purpose of eliminating the federalbudget deficit is to give the private sector morecapital to invest, thus widening opportunities andraising earnings for all Americans. Balancing thefederal budget is not a goal in itself, but is a meansto higher living standards for all.

Yet as we all see, there is no guarantee thatcorporations will use the extra resources in thisway. Maximizing shareholders’ returns may requireinvesting the extra dollars in production abroad; orin labor-saving equipment intended to reducewages and cut jobs; or in mergers, acquisitions, anddivestitures that result in mass layoffs.

How, then, to get the private sector to takemore responsibility for their employees and thecommunities in which they live, as the federalgovernment retreats?

I do not advocate a return to the era ofindustrial statesmanship. That era, too, is over.Even if we could turn the clock back and enlargeupon the CEO’s former discretion in balancing theinterests of shareholders against those of employ-ees and communities, it is far from clear that

2 James J. Heckman, Rebecca Roselius, and JeffreySmith, “U.S. Education and Training Policy: A Re-evaluation of the Underlying Assumptions Behind the‘New Consensus,’” in Labor Markets, EmploymentPolicy, and Job Creation, edited by Lewis Solmon andAlec Levenson, Westview Press, 1994. Heckman’sestimate works out to $170 billion per year for 10 years,but that sum includes the cost to individuals offoregoing income during the course of job training.Therefore, cost to the government is probably closer to$60 billion per year.

59

Appendix A

society should vest such power in private citizens.Exhortation can have some effect. After all,

most companies are understandably concernedabout their public image. Good corporate citizen-ship is often a wise business strategy. One recentexample involves the growing problem of sweat-shops in the garment industry. As anyone who hashad anything to do with this industry knows, thebig retailers call the shots. They have the buyingpower to determine how the industry runs. Afterslave-labor conditions were discovered in Californiasweatshops last summer, we published the namesof several of the nation’s largest retailers to whichthe garments in question had been shipped.Subsequently, during the Christmas gift-buyingseason, we published the names of big retailersthat had pledged to regularly inspect their contrac-tors or to require that the manufacturers withwhom they deal do so. These measures have begunto work. More than a dozen of the nation’s topretailers have joined us in our campaign againstsweatshops. I hope and expect that others will do soas well.

Earlier I listed several companies that havedistinguished themselves as fine employers. Manycompanies are also taking an active role in improv-ing their communities—actively participating inlocal training programs and contributing to thepublic schools. They too deserve commendation.Unfortunately, these efforts are too often cancelledout by companies that conduct bidding wars amongstates or localities, threatening to leave one placeor offering to go to another depending on how muchtheir taxes are cut or how much of a cash subsidythey can elicit from the public sector. Such tacticsresult in a giant zero-sum game, which fails tocreate a single new job but merely moves the oldones from place to place, leaving a trail of pink slipsand abandoned communities. It also puts compa-nies that don’t play the game and don’t get the taxbreaks or subsidies at a competitive disadvantage.Worse yet, such bidding wars drain state and localgovernments of scarce resources that could other-wise be invested in schools, technical training, andphysical infrastructure. Starting bidding wars fortax breaks or subsidies is the opposite of goodcorporate citizenship, and it deserves condemna-tion.

Assume that we have gone as far as possiblein exhorting companies to be more responsible and

in quelling their appetite for political favor. Wehave gained some ground, but most working peopleare still insecure and the income gap continues towiden. What else can be done?

■ A Modest ProposalLet’s look at the basics. The corporation is, remem-ber, a creation of law; it does not exist in nature.The corporate form of business carries specialadvantages: Investors are not personally liable fordamages or debts. A corporation has the samerights of free speech and legal action that anindividual has—but can live forever. There aredisadvantages as well: Corporations must pay taxeson their incomes, as do the investors who receivedividends, resulting in double taxation.

If we want business to take more responsibil-ity for the American workforce and its transforma-tion to the new global economy, we will have to alterthis mix of advantages and disadvantages toprovide the proper incentives. If we want companiesto do things that do not necessarily improve thereturns to shareholders but that are beneficial forthe economy and society as a whole—actions suchas upgrading the general skills of employees,providing them with decent pension and health careprotections, sharing more of the profits with them,and, when laying them off, retraining them andplacing them in new jobs—we have to give businessan economic reason to do so. One possibility wouldbe to reduce or eliminate corporate income taxesonly for companies that achieve certain minimumrequirements along these dimensions.

This is, admittedly, a modest proposal. Thetax code already treats different types of organiza-tion differently. Charitable organizations, meetingcertain minimal requirements of structure andbehavior, are treated quite differently from thestandard corporation, as are partnerships andproprietorships. These differences reflect judgmentsabout the societal benefits and responsibilitiesstemming from these various forms of organization.Similarly, there are societal advantages in improv-ing the quality and flexibility of the work force, andsocietal costs in failing to do so. Certain enterprisesmay be well-positioned to maximize these advan-tages and minimize these costs. Let us, as a society,encourage them do so, and reward them accord-ingly.


60

Those who worship at the altar of the freemarket need not fear blasphemy. I am not suggest-ing that corporations be required (or induced) tokeep on their payroll workers who don’t contributeto the bottom line. I am not asking that theyremain in communities when there are moreefficient places to produce their wares, or to takeany other action which may reduce returns toshareholders. I am suggesting, however, a means ofmaking corporations more accountable for thesocial costs and benefits of economic change.

■ A National DiscussionOthers will have different ideas for how corpora-tions can best respond to the growing inequalitiesand insecurities in our workforce. Let us have anational discussion about this—about the role ofthe corporation at this unique moment in history.Surely this discussion is no less important than theone we are having about the role of government.Chief executives should contribute to this discus-sion—not in order to defend the status quo but inrecognition that the trends we are observing cannotbe allowed to continue. In this era of smallergovernment, at a time when so many Americansare foundering in the face of record profits and asoaring stock market, the failure of the private

sector to respond imperils this nation’s continuedprosperity and stability.

■ ConclusionWill the end of the era of big government witness anew era of corporate responsibility? Nobody can yetsay for sure. But I am certain that, unless checked,the resentment of stranded workers will eventuallyundermine the political preconditions for continuedbusiness prosperity. If too many of our people feelexcluded from the upside gains of a growingeconomy and disproportionately burdened by itsdownside risks and costs, they will support policiesthat sacrifice growth in favor of economic security—policies like trade protection, capital controls, andinflexible rules of employment.

I sincerely hope we do not ever get to thatpoint. You in this room have an enormous interestin sustaining the culture of openness and economicdynamism that has served business so well.Fortunately, as you move on to positions of corpo-rate leadership, you will also be able to exerciseyour influence in ways that make such an outcomemore likely. I urge you, for the sake of our country,to help create and sustain a new era of corporatecitizenship.

This document can be found online atwww.dol.gov/dol/asp/public/programs/history/reich/speedhes/sp960206.htm

61

Appendix B

BJob Creation and EmploymentOpportunities: The United States LaborMarket, 1993–1996A report by the Council of Economic Advisers with the U.S. Department ofLabor, Office of the Chief Economist, April 23, 1996

■ Executive Summary• Since January 1993, employment has grown rapidly—expanding by 8.5 million net new jobs. Based

on comparable data, employment growth has been stronger in the United States than in any of ourG-7 partners.

• Two-thirds (68 percent) of the net growth in full-time employment between February 1994 and Febru-ary 1996 occurred in industry/occupation groups paying above-median wages. More than half of the netgrowth occurred in the top 30 percent of job categories. Although many of these new jobs were in theservice sector, they did not conform to stereotypes.

• The evidence suggests that the vast majority of the net new jobs are full time. Both the household andestablishment survey suggests that the proportion of employed persons working multiple jobs hasremained at about 6 percent.

• The share of workers holding multiple jobs has remained roughly constant since the late 1980s. Thehousehold survey suggests that the proportion of employed persons working multiple jobs has re-mained at about 6 percent.

• The overall number of workers displaced was roughly the same proportion of the workforce in 1991–2as in 1981–2, although the recession during the early 1980s was more severe than the one during theearly 1990s. However, it is difficult to determine precisely how to account for the business cycle inassessing displacement rates. The official data on displacement after 1993 are not yet available, but analternative job loss measure has fallen since then.

• The characteristics of displaced workers have changed somewhat. Displacement rates for older, white-collar, and better educated workers have risen, although they remain low relative to those for younger,blue-collar, and less educated workers.

• Despite some recent positive signs, long-term challenges remain. Between the 1970s and the early1990s, real wages stagnated and income inequality widened. But in 1994, for the first time in fiveyears, real median family income rose and the poverty rate fell. We must continue to build on thesegains to improve living standards and reduce income inequality. And although many more jobs arebeing created than destroyed, a dynamic economy inevitably imposes costs on some workers. Forexample, data from 1981 to 1993 indicate that job losers were more likely to be permanently dismissed(rather than temporarily laid-off), that older workers were subject to greater risk of job displacement,and that the average real wage loss due to displacement was significant and persistent. In order toobtain the full benefits of a dynamic economy, we must reduce these adjustment costs.


62

■ IntroductionEmployment growth in the United States has beenrobust since January 1993, with nonfarm payrollemployment expanding by 8.5 million. Based oncomparable data, U.S. employment growth hasbeen stronger than in any of our G-7 partners. Thefirst purpose of this study is to sift through theevidence to develop a more detailed picture ofwhere the job growth is occurring and the nature ofthe jobs being created.

The news is encouraging: Employment hasgrown disproportionately in the industry/occupa-tion job categories paying above-median wages.Even in the traditionally lower-paying serviceindustry, a majority of the net employment growthhas been managerial and professional specialtypositions, which typically pay above-median wages.Contrary to conventional wisdom, the new jobsare not disproportionately part-time, low-skillpositions.

The second purpose of the study is toexamine job displacement. Although the economy isgenerating millions of net new jobs, it is clear thatthe speed of transformation in the U.S. labormarket has left many American workers anxiousabout their economic futures. A dynamic andgrowing labor market can impose costs as well asoffer opportunities, and policies to help workersdeal with job transitions are critical to reducingthese adjustment costs.

■ Job CreationAccording to the Bureau of Labor Statistics estab-lishment survey, nonfarm employment grew by8.5 million (7.8 percent) between January 1993 andMarch 1996. Private-sector payrolls (up 8.7 per-cent) grew even faster, while federal payrolls(excluding the postal service) actually declined by11.4 percent, and state and local governmentpayrolls combined grew by 5.0 percent (seefigure 1). The public sector’s share of employmentis therefore falling.

The unemployment rate has fallen frommore than 7 percent in January 1993 to 5.6 percentin March 1996, and has been below 6 percent for19 consecutive months. Given current demographictrends, the Bureau of Labor Statistics projects thelabor force to continue growing by approximately1.1 percent annually between 1994 and 2005.

Therefore, to keep unemployment low, the economyneeds to average a net increase of about 120,000new jobs per month. Employment is now expandingat a pace consistent with steady, sustainablegrowth and low unemployment.

International Comparisons

The United States has experienced faster employ-ment growth than any of the other G-7 countries.Only Canada has experienced any significantemployment growth, while the other G-7 membershave experienced negligible job gains or outrightdeclines. The U.S. labor market performance isparticularly impressive given that it has occurredduring a period in which the federal budget deficitwas reduced from 4.9 percent of GDP in FY 1992 toan estimated 1.9 percent in FY 1996.

■ The Quality of JobsAccording to data from the Current PopulationSurvey, 38 percent of the net employment growthbetween February 1994 and February 1996 oc-curred in “service” industries.1 This section there-fore first examines job quality in the service sector.

-15

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Figure 1Private Sector and Government

Employment Growth

January 1993–March 1996

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Private Sector Government

Federal

Note: Federal employment excludes the postal service.Based on data from the Bureau of Labor Statistics, establishment survey.

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State & Local8.7

1 A major redesign of the survey in January 1994makes long-term comparisons difficult. Moreover,because the household survey data are often notseasonally adjusted, we try to compare the same monthin different years. The sample period is thereforeFebruary 1994 to February 1996.

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Appendix B

It then presents a more detailed analysis of allsectors of the economy.

Higher-Paid Jobs in the Service Sector

The “service sector” is quite diverse. It includesmany low-wage positions, but also many high-wagepositions in financial services, hospitals, andcomputer and accounting services. For this reason,it is important to determine whether employmentgrowth within services has occurred primarily inthe high-skill managerial and professional specialtyoccupations or in low-paying occupations. TheCurrent Population Survey provides evidence onemployment growth by occupation.

• The data show that recent net job growth inservices has been predominantly in managerialor professional specialty positions (figure 2).These are relatively high-paid occupations.

Thus, the conventional wisdom suggestingthat the growth in service sector employment isdisproportionately concentrated in low-wage jobcategories is wrong.

Growth of Higher-Paid Jobs by Industryand Occupation

An even more detailed picture of the nature of thenew jobs created emerges from an examination of

industry/occupation categories. Using data from theFebruary 1994 and February 1996 Current Popula-tion Surveys, we sorted full-time workers into45 detailed occupations in 22 major industries. Aquarter of the sample reported earnings in additionto the industries and occupations in which theyworked. Although many of the possible 990 indus-try/occupation cells were small, only 6 percent ofthe population-weighted sample was found in cellswith 10 or fewer sample members reportingearnings data for both surveys. In order to avoidthe high sampling variability associated withinsufficient numbers of observations, we eliminatedthese small cells from our analysis. There were287 job categories in each year after eliminatingthe cells with 10 or fewer sample members.2

The first step in our analysis was to rankthe 287 occupation/industry cells by the medianweekly earnings of full-time workers. Approxi-mately half of all full-time employment in February1994 was found in cells with median weeklyearnings above $480 (in February 1996 dollars).The employment growth in these “high-wage” jobcategories can then be compared to overall employ-ment growth. Our key measure of job quality is the

Figure 2Service Industry Occupations, February 1994–February 1996

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Higher Wage Occupations ➝

Based on data from the Bureau of Labor Statistics, Current Population Survey.

2 The average remaining industry/occupation cellsincluded 331 sample members and contained earningsdata for 70 sample members.


64

percentage of total employment growth thatoccurred within the occupation and industrycategories that paid above-median wages in Febru-ary 1994. The results were striking.

• Two-thirds (68 percent) of the net growth in full-time employment between February 1994 andFebruary 1996 was found in job categoriespaying above-median wages.3

More Detailed Data on Occupations

The Bureau of Labor Statistics also publishes anannual series on wages and employment growth foran extremely detailed set of occupational catego-ries, based on pooling a year’s population surveyresponses. The survey included 488 categories withdata for both 1994 and 1995 (the 1996 annualestimates will not be available until next year). Theresults from this data set give additional support tothe results reported above. Some of the categorieswith the largest employment gains included “salessupervisors and proprietors,” “electricians,” “man-agers of marketing and advertising,” and “electricaland electronic engineers.” And consistent with theabove calculations, the detailed occupations in thetop half of the wage distribution accounted for70 percent of the net employment growth, while thetop 10 percent of the distribution produced a thirdof net employment growth.

• Employment in “hamburger-flipping jobs”4

actually fell between 1994 and 1995.

In sum, the data indicate the following about thenature of recent job growth:

• Two-thirds of full-time job growth betweenFebruary 1994 and February 1996 occurred inoccupation/industry categories paying above-median wages.

• More than half of full-time job growth betweenFebruary 1994 and February 1996 was inoccupation/industry categories paying evenhigher wages (top 30 percent).

The New Jobs Are Mostly Full Time

Data from both the Current Population Survey andthe BLS establishment survey indicate that most ofthe net new jobs are full time. The Current Popula-tion Survey includes data on part-time employ-ment. Figure 4 portrays the proportion of employedpersons reporting that they worked part time for“economic” as well as “non-economic” reasons.

Figure 3Shares of Net Employment Growth

February 1994–February 1996

Lower Paying job categories32% of growth

Higher Paying job categories68% of growth

Top 3 deciles52%

Next 2 deciles16%

Council of Economic Advisers analysis of Bureau of Labor Statistics data.

Another way to summarize the results fromour industry/occupation analysis is shown infigure 3. Here we ranked the 287 industry/occupa-tion categories by their median weekly earnings forfull-time workers, and sorted them into 10 orderedgroupings—each with 10 percent of employment inFebruary 1994—by their earnings ranking. If all10 groups had grown proportionately to their shareof employment in February 1994, each would haveaccounted for 10 percent of the net new employ-ment. But rather than accounting for their propor-tional share of total employment growth(30 percent), the top three deciles accounted formuch more (more than 50 percent).

• More than half (52 percent) of employmentgrowth was found in the top 30 percent of jobcategories.

3 As a result of sampling variability in the monthlysurveys, the precise figure may be affected by themonths chosen for comparison. We have also performedthe same exercise using hourly wages for full-time andpart-time workers combined. The results are similar.

4 These are defined as workers in the food counter,fountain, and related occupations; and kitchenworkers, food preparation, and miscellaneous food-preparation occupations. The result holds both for full-time and for all workers (full-time and part-timecombined).

65

Appendix B

Despite a shift in both series corresponding to aredesign of the survey in January 1994, the propor-tion of employed persons reporting to be employedpart time has actually declined slightly. Thedeclines have been even larger for those workingpart time for “economic” reasons, often referred toas the “involuntarily underemployed.”

The establishment data indirectly supportthe conclusions from the household survey. If thenet new jobs were disproportionately part time, wewould expect average hours worked per job to fall.5

But the employment data show that average hoursworked for all jobs (including the new jobs) re-mained roughly constant: The number of nonfarmpayroll positions and the total number of hoursworked both grew at about the same rate over the

past three years (see table 1). This suggests thatthe new jobs have not been disproportionately part-time.

• Data collected from both households and compa-nies indicate that most of the net job creationover the past three years has been full time.

Little Change in Multiple Job Holding

Some Americans decide to hold more than one job,in order to save for a house or to meet unexpectedexpenses. Nonetheless, multiple job holding wouldraise concerns about the quality of jobs if anincreasing number of Americans have to work twoor three jobs to make ends meet. A frustratedworker is said to have reacted to the news that8.5 million new jobs have been created by replying,“Yeah, and I have three of them.” But the datasimply do not indicate any significant movement inmultiple job holding. The percentage of employedpersons working multiple jobs has remained in theneighborhood of 6 percent since the late 1980s.

Figure 4Part-Time Workers

Jan. 1990 Jan. 1991 Jan. 1992 Jan. 1993 Jan. 1994 Jan. 1995 Jan. 1996

Non-Economic Reasons

Economic Reasons

CPS Redesign➝

16

14

12

10

8

6

4

2

Pece

ntag

e of

Em

ploy

men

t


Table 1Employment and Hours Worked

at Nonfarm Establishments

January March Percentage1993 1996 Change

Employement (millions) 109.5 118.0 7.8Hours worked (annual basis, billions) 202.2 217.8 7.7

Based on data from the Bureau of Labor Statistics.

5 This assumes that average hours worked on existingjobs did not change. Unfortunately, existing statisticsdo not allow us to verify whether this assumptionholds.


66

Impact on Wages and Income Inequality

Between the 1970s and the early 1990s, averagereal wage growth slowed and income inequalitywidened. In recent years, however, there are someencouraging signs that the tide may be turning onthese labor market challenges. In 1994—the mostrecent year for which data are available—realmedian family income rose and the poverty rate fellfor the first time in five years. Improving jobquality can enhance these recent gains, althoughthe effects may become manifest only after anextended period of time. As discussed above, mostof the recent net increase in employment hasoccurred in occupations and industries thattypically pay above-median wages. But theadditions to the work force have had only amarginal effect on aggregate wage data, becausenet employment growth represents only a relativelysmall percentage of total employment for the U.S.work force. Nevertheless, the news about thequality of net job growth is encouraging and bodeswell for the future. Although there is still much leftto be done, recent trends show that the labormarket is on the right track.

■ The Challenges Createdby a Dynamic Labor Market

A dynamic, healthy labor market creates enoughjobs to accommodate a growing labor force. But atthe same time, jobs in a dynamic economy continu-ally shift away from certain areas and toward otherareas with greater growth opportunities. (Forexample, the decline in federal payrolls has beenmore than offset by increases in private-sectoremployment.) Meanwhile, research conducted byRobert Valletta and published by the FederalReserve Bank of San Francisco concluded that,after controlling for the business cycle, the share ofunemployment attributable to permanent dismiss-als (rather than temporary layoffs) has increased—particularly from 1980 to 1993. A higher proportionof job losers thus do not expect to be recalled bytheir former employers. As a result of these labormarket changes, many workers feel less secureabout their job prospects.

While the anxiety felt by many workers isreal and important, it is also important to take anobjective look at the evidence. Not all sourcesdemonstrate increased economic anxiety. For

Table 2Changing Incidence of Displacement

Displacement Rates*

1981–2 1991–2

Total Occupations 3.9 3.8White collar 2.6 3.6Blue collar 7.3 5.2

Age25–34 years of age 5.0 3.835–44 years of age 3.8 3.945–54 years of age 3.0 3.8

example, the Michigan and Conference Boardsurveys of consumer sentiment recently have beenabove their historical averages. Respondents tothose surveys apparently do not view employmentprospects as poor. Nevertheless, considerableevidence suggest that many Americans are con-cerned, some very concerned, about job displace-ment. In order to know how best to respond to theseconcerns, we need a more precise assessment of thenature of the displacement problem. Has jobdisplacement in fact increased? Is it affectingdifferent categories of individuals today than it did10 years ago? This section of the report examinesthese questions.

Evidence from the Displaced Worker Survey

The BLS conducts a survey of displaced workersevery two years, with the most recent publisheddata from February 1994. Table 2 summarizes thedisplacement rates (defined as the number ofworkers displaced per 100 employed) for the1981–82 and 1991–92 periods.

The overall number of workers displacedwas roughly the same proportion of the work forcein 1991–2 as in 1981–2, although the recession inthe early 1980s was more severe than the one inthe early 1990s. However, it is difficult to deter-mine precisely how to account for the business cyclein assessing displacement rates. A comparison ofaggregate displacement rates also conceals afundamental change in the incidence of job dis-placement. The table shows that older, white-collarworkers were considerably more at risk of displace-

55+ years of age 3.6 4.3

*Expressed as a percentage of workers with three or more years oftenure on their current job.Based on data from the Bureau of Labor Statistics.

67

Appendix B

Figure 5New Job Losers

1.2

1

0.9

0.6

0.4

Unemployed new job losers excluding temporary layoffs

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994


Perc

enta

ge o

f em

ploy

men

t

ment in 1991–92 than during the previous reces-sion. And further analysis shows that job displace-ment rates rose for more educated workers. Thesechanges in the incidence of job displacement maybe a reason for the reports of heightened anxietyregarding job loss. Although blue-collar and lesseducated workers remain more likely to be dis-placed than others, displacement rates have clearlyrisen among those workers who had previouslybeen largely immune from the threat of job disloca-tion.

• Displacement rates for older and more educatedworkers, who had largely been unaccustomed tofacing such risk, rose between 1981–2 and1991–2.

Indicators of Recent Job Displacement

As noted above, the Displaced Worker survey isconducted only once every two years, and the mostrecent published data are from the 1994 survey,which covers the 1991–93 period. Unfortunately,the official displacement data for the period after1993 are not yet available.6 (The results of the 1996

Displaced Worker Survey, conducted in February,should be available later this summer.) Until theofficial displacement data are available, othermeasures can be used to get an indication of howthe labor market has been changing since 1993.

One indicator comes from unemploymentdata on job losers. Figure 5 shows the job loss rate,defined as the ratio of recently unemployed joblosers—those who are unemployed due to job loss(as opposed to job leavers or labor market en-trants), unemployed less than five weeks, and noton temporary layoff—to total employment in theCurrent Population Survey. This job loss rateroughly approximates the net “flow” into unemploy-ment due to job loss, because it considers only thosewho have lost their jobs recently. As shown inFigure 5, the job loss rate has continued to fallsince 1992.

• Official data on job displacement are not yetavailable beyond 1993. But based on unemploy-ment data for job losers, the job loss rate hasdeclined since then.

The Costs of Job Displacement

The Displaced Worker Survey provides informationon the impact of job loss.

6 Based on previous experience, the displacement ratefor 1993 is likely to be lower in the 1996 survey datathan in the 1994 survey data.

69

Appendix C

CBibliography

Conte, Christopher R. “The Changing World ofWork and Employee Benefits.” EBRI Notes, no. 3(Employee Benefit Research Institute, March1996): 1–4.

________. ”Comprehensive Tax Reform: Implica-tions for Economic Security and EmployeeBenefits.” EBRI Notes (Employee BenefitResearch Institute, June 1996): 1–5.

________. “Do Employers/Employees Still NeedEmployee Benefits?” EBRI Notes no. 2 (Em-ployee Benefit Research Institute, February1998): 1–4.

Fronstin, Paul. “Employee Benefits, RetirementPatterns, and Implications for Increased Work.Life.” EBRI Issue Brief no. 184 (EmployeeBenefit Research Institute, April 1997).

________. “Employee Benefits and Workers in theNonprofit Sector.” EBRI Notes, no. 4 (EmployeeBenefit Research Institute, April 1997): 3–6.

________. “Employment-Based Health Insuranceand the Changing Work Force.” EBRI Notes,no. 6 (Employee Benefit Research Institute,June 1997): 1–3.

________. “Health Benefits in a Flat Tax World:Results from an EBRI/Gallup Survey.” EBRINotes no. 7 (Employee Benefit Research Insti-tute, July 1996): 4–5.

________. “Retiree Health Benefits: What theChanges May Mean for Future Benefits.” EBRIIssue Brief no. 175 (Employee Benefit ResearchInstitute, July 1996).

Garlick, David. “Benefits in Small IndependentBusinesses.” EBRI Notes, no. 5 (EmployeeBenefit Research Institute, May 1997): 5–8.

________. “Benefits in Small Private Establish-ments. EBRI Notes, no. 2 (Employee BenefitResearch Institute, February 1997): 6–9.

Olsen, Kelly. “Retirement Annuity and Employ-ment-Based Pension Income.” EBRI Notes, no. 6(Employee Benefit Research Institute, June1997): 4–6.

Olsen, Kelly, and Jack VanDerhei. “Defined Contri-bution Plan Dominance Grows Across Sectorsand Employer Sizes, While Mega DefinedBenefit Plans Remain Strong: Where We Areand Where We Are Going.” EBRI Special ReportSR-33 and EBRI Issue Brief no. 190 (EmployeeBenefit Research Institute, October 1997).

Ostuw, Pamela. “Access to and Sources of HealthInsurance Coverage of the Near Elderly.” EBRINotes no. 5 (Employee Benefit Research Insti-tute, May 1997): 1–4.

________. “Sources of Health Insurance CoverageAmong Part-Time Workers.” EBRI Notes, no. 9(Employee Benefit Research Institute, Septem-ber 1997): 5–9.

Paine, Thomas H. “The Future of Employee Secu-rity.” EBRI Notes no. 5 (Employee BenefitResearch Institute, May 1996): 1–4.

Paul, Robert D. “The Future of Work and theEmployer-Employee Relationship.” EBRI Notesno. 4 (Employee Benefit Research Institute,April 1996): 1–4.

Rheem, Edina. “Benefits Are a Substantial Compo-nent of Total Compensation.” EBRI Notes no. 12(Employee Benefit Research Institute, December1995): 1–4.

Salisbury, Dallas L. “Employee Benefits in a FlatTax or Consumption Tax World.” EBRI Notes,no. 9 (Employee Benefit Research Institute,September 1995): 1–11.

Salisbury, Dallas L., Ed. America in Transition:Benefits for the Future. Washington, DC: Em-ployee Benefit Research Institute, 1987.

________. Business, Work, and Benefits: Adjustingto Change. Washington, DC: Employee BenefitResearch Institute. 1989.

________. Retirement Prospects in a Defined Contri-bution World. Washington, DC: EmployeeBenefit Research Institute, 1997.

________. Tax Reform: Implications for EconomicSecurity and Employee Benefits. Washington,


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DC: Employee Benefit Research Institute, 1997.________. When Workers Call the Shots: Can They

Achieve Retirement Security? Washington, DC:Employee Benefit Research Institute, 1995.

Salisbury, Dallas L., Ken McDonnell, and EdinaRheem. “The Changing World of Work andEmployee Benefits.” EBRI Issue Brief no. 172(Employee Benefit Research Institute, April1996).

Salisbury, Dallas L., and Nora Super Jones. Retire-ment in the 21st Century… Ready or Not. Wash-ington, DC: Employee Benefit Research Insti-tute, 1994.

Yakoboski, Paul. “Worker Displacement, 1993–1995: Demographics and Implications.” EBRIIssue Brief no. 186 (Employee Benefit ResearchInstitute, June 1997).

________. “Tax Reform and the Discipline of Em-ployment-Based Retirement Plans.” EBRI Notes,no. 5 (Employee Benefit Research Institute, May1996): 5–7.

Yakoboski, Paul, and Allen Schiffenbauer. “TheReality of Retirement Today: Lessons in Plan-ning for Tomorrow.” EBRI Issue Brief no. 181(Employee Benefit Research Institute, January1997).

71

Appendix D

DList of Policy Forum Attendees

William ArnoneErnst & Young LLP

Chris BaylyffEBRI

James BellThe Mead Corporation

Robert BellThe Southern Company

James BentleyAmerican Hospital Association

Caroline BerverOffice of U.S. Senator Bob Graham

Dawn BizzellPension Benefit Guaranty Corporation

Ron Blackwell (speaker)AFL-CIO

Don BlandinAmerican Savings Education Council

Francis Bonsignore (speaker)Marsh & McLennan Companies, Inc.

Steven BoycePension Benefit Guaranty Corporation

Bill CarrollAT&T

William Chapman, IIZurich Kemper Investments Inc.

Maureen ConnellyAFL-CIO

Christopher ConteEBRI Fellow

Craig CopelandEBRI

Susan CrownCitibank

Mary Ann CzarcinskiMetLife Insurance Company

Patsy D’AmelioEBRI

James DelaplaneOffice of U.S. Representative Earl Pomeroy

Diana DennettAmerican Association of Health Plans

Susan DentzerU.S. News & World Report

Richard DunnGeneral Electric Company

Thomas EngIBM

Gina FalconioU.S. Senate Aging Committee

Howard FluhrThe Segal Company

Ellie FriendEFI Actuaries

Paul FronstinEBRI

72


Dale Gifford (speaker)Hewitt Associates

Laurie GoldsteinMetLife insurance Company

Tracee GrossOffice of U.S. Representative Earl Pomeroy

Don HarringtonAT&T

Gary HartCarter-Wallace, Inc.

Jeff HartSwiss Re Life & Health

Russ HawkinsAlliedSignal, Inc.

Ron HovisSBC Communications, Inc.

W. B. HowdenThe Southern Company

R. Kenneth HutchinsonUniversity of Missouri (HEBRG)

Joanne InmanIBM

Paul JacksonConsulting Actuary

Bill JamesPension Benefit Guaranty Corporation

Jeffrey JohnstonDecision Innovations

Michael KahnNational Education Association

Ed KavjianGeneral Motors

James King (speaker)Trinity College

James Klein (speaker)APPWP—The Benefits Association

Jane LassnerJ.P. Morgan

Liz LiessU. S. Senate Aging Committee

Joseph LoCiceroBuck Consultants

Michael Losey (speaker)Society for Human Resource Management

Michael MahoneyMilliman & Robertson

Carl MarinacciAmoco Corporation

David MaslenAon Consulting

Anthony MazzeoBristol-Myers Squibb Company

Peter McCauleyPharmacia & Upjohn

John McCormackTIAA-CREF

Ken McDonnellEBRI

Edward McGannChase Manhattan Bank

Peter McMenaminAmerican Medical Association

George O’DonnellAT&T Actuarial Sciences Associates

Kelly OlsenEBRI

Dale OrredUnited Parcel Service, Inc.

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Appendix D

Pamela OstuwEBRI

Joey ParrPacific Maritime Association

Robert PaulEBRI Fellow

Joe PiacentiniPension & Welfare Benefits Administration

Bill PierronEBRI

Congressman Earl Pomeroy (speaker)U.S. House of Representatives

Dick PreyThe Principal Financial Group

Carol QuickEBRI

Kristin RegulaHealth Insurance Association of America

Robert Reischauer (speaker)The Brookings Institution

Maureen RichmondEBRI/ASEC

Stephanie RobinsonEBRI

Dallas Salisbury (speaker)EBRI

Nancy SaltfordProfessor Emeritus, Cornell University

Bridget SamburgMoney Management Letter

Tom SchlossbergDiversified Investment Advisors

John SeiterCapital Guardian Trust Company

Harry SmithRetired, Sun Company, Inc.

John StomaOppenheimer Funds

David Strauss (speaker)Pension Benefit Guaranty Corporation

Libby TerryHewitt

Charles Tharp (speaker)Bristol-Myers Squibb Company

Jack VanDerheiTemple University and EBRI Fellow

John WadeNational Rural Electric Cooperative Association

Ronald WalkerWilliam M. Mercer Companies

Howard WeizmannWatson Wyatt Worldwide

Elizabeth WhiteReporter, Pension & BenefitsBureau of National Affairs

Stan WisniewskiNational Education Association

Paul YakoboskiEBRI

do employers/ employees still need employee benefits?

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