Preface

This report briefly describes factors and methods used to

evaluate jobs; set pay structures; design benefit plans; and

finance benefit plans for cooperative employees. The terms

“wages,” “salaries,” and “pay” are used interchangeably.

While this report may provide general guidelines, it does

not adequately address all of the unique requirements, skills,

or risks associated with a given position or cooperative. Newly

organized cooperatives must consider and project all types of

costs such as salaries for all employees, potential sales, and

expenses. Projections for sales and salaries for employees

should be conservative. Adjustments may be made by newly

organized or existing cooperatives when replacing employees

who have retired or left the organization.

ACS Service Report 36

September 1993
Contents

External Factors .................................................................... .1

Internal Factors ..................................................................... .3

Job Evaluations ...................................................................... 3

Establishing the Pay Structure ............................................... 9

Wage Surveys ................................................................... .9

Wage Structures.. .............................................................. .9

Benefits ............................................................................... .I2

Retirement.. ..................................................................... .13

Unemployment Plans ....................................................... 18

Health Insurance .............................................................. 21

Life insurance.. ................................................................ .22

Disability Insurance ......................................................... .22

Paid Days Off ................................................................... 23

Educational Assistance.. ................................................. .24

Evaluating Employee Benefit Plan ....................................... 25

Designing Employee Benefit Plan ........................................ 27

Financing Benefits ............................................................ 29

Summary.. ........................................................................... .29

Appendix ............................................................................. .31

References.. .................................................................... .31

iii
Guide to Designing Benefit

Packages for Cooperatives

Beverly L. Rotan

ACS Economist, Cooperative Services Division

A

major challenge for all cooperatives is attracting and

keeping productive people. Cooperatives must offer

employees compensation commensurate with their experience

and skills. Compensation can be both direct (salaries and

wages) and indirect (benefits). It is important to provide a

proper mix of direct and indirect compensations to attract and

keep competent employees who can enhance margins and

membership savings for cooperatives.

There are no universal norms to guide the choice of what

to pay any given employee, but some internal and external

factors should be considered. Cost management (sales and

operating expenses), job responsibilities, employee’s educational background, experience, and/or skill, and number of

employees needed are internal factors that may influence

salaries and benefits. External factors include Federal and

State Government policies and regulations, labor market, competitive environment, etc. This report will touch on internal

and external factors, and general information that could affect

decisions of management in setting salaries and offering benefits.

EXTERNAL

External factors are anything outside and independent of

FACTORS

the cooperative that could influence the benefit packages.

External factors affecting pay structures are the competitive

environment, labor markets, and Federal and State

Government policies and regulations. Other organizations in
the same geographic area must be considered when setting

salaries and benefits because they are competing for the same

labor market. That market includes all noninstitutional people

over the age of 16 who are looking for employment.

Laws and regulations must also be considered because

they set guidelines for required or prohibited practices. Some

major U.S. employment laws stemmed directly from economic

conditions which prevailed before the 1930s. These laws have

several purposes: (1) expanding employment; (2) compensating workers at levels that allow them to maintain a minimum

standard of living; (3) providing income maintenance during

periods of job loss, disability, or retirement; and (4) promoting

employees’ abilities to bargain collectively. l

Examples of Federal wage and hour laws include: Fair

Labor Standards-provides a minimum wage and provided

for overtime pay; Civil Rights and Equal Pay Act-protects

employees from discrimination; Social Security Act-provides

income security for retirees, dependent survivors, and disabled persons insured by payroll taxes on their earnings;

Federal Unemployment Act-provides for persons who have

been employed and lost their jobs through no fault of their

own; Workers Compensation-provides salary (pays twothirds of an employees’ weekly wage) for work-related accidents or illnesses; and Employment Retirement Income

Security Act (ERISA)-provides a variety of formulas for vesting of retirement benefits after a certain length of service.

These Federal Government acts are highlights of regulations that management must be aware of when making compensation decisions. Many other laws and regulations also are

standards for fair compensation and working conditions.

1 Personnel/Human Resource Management, Herbert G. Henneman,

Donald I’. Schwab, John A Fossum, and Lee D. Dyer. Richard D. Irwin,

Inc., Homewood, Illinois 60430.

2
INTERNAL FACTORS

Internal factors are those dependent on the conditions,

needs, and desires of the cooperative. Internal factors include

not only business considerations such as cost of equipment,

administrative cost, and salaries, but also factors that apply to

the employee. These factors include the educational background of employee, skill, physical ability (as required by

job), and experience.

JOB EVALUATIONS

Management may use various tools to evaluate its workforce to develop an equitable pay structure. One invaluable

tool is the job evaluation. A job evaluation analyzes, describes

and values the duties of a job, its authority, relationships,

skills required, and conditions of work compared with other

jobs in the organization. Fairness is essential to job evaluations

for both the employee and the cooperative.

Job evaluations are also used to develop job descriptions

and specifications, and to determine the value of them in relation to all jobs within an organization through ranking. There

are three significant steps in this evaluation process-(fig. 1).

Step l-Formal or informal preliminary planning. The

informal approach involves an intuitive ranking of jobs. The

formal approach is more costly and involved. It is a relatively

systematic application of standards and decision rules to rank

or rate jobs. An organization may decide to make or buy a

plan. The manager in small cooperatives and personnel director in larger ones usually direct this effort.

Step 2-Selecting a job-evaluation method. There are

several job evaluation methods (fig. 2). They include:

Ranking-Jobs are arranged by a committee of management and employee representatives in a simple highest to

lowest rank. Each job is compared with the preceding one to

determine which is more important or difficult. This step continues until all jobs have been ranked. Disadvantages to this

3
Figure I- Steps in Evaluating Jobs

Step 1

Preliminary Planning

l FormaVlnformal

l Make/Buy

l Who?

t

Step 2

Selected Method

l Ranking

0 Classification

l Factor Comparison

l Point

Implementation

4
Figure 2- Advantages and Disadvantages of Job

Evaluation Methods

Job Evaluation

Method

Ranking

Classification

Advantages

1. Least complex

met hod

1. Equitable

I

Factor Comparison

Point

1. Requires a set of

standard jobs

2. Tailor made

approach

3. Determines relative

value of each job

4. Logical

1. Widely used

2. Most stable

3. Minimizes rating

errors

Disadvantages

1. Unmanageable with

large numbers

2. No definite or

consistent standards

3. No knowledge of

distance between

the ranks

1. Same as ranking

met hod

2. Difficult to classify

jobs

1. Complex

1. Expensive

2. Time consuming to

implement and

maintain

5
method include: a) unmanageable with a large numbers of

jobs; b) no definite or consistent standards to justify rankings;

and, c) no knowledge of distance between the ranks.

Classification-Grades are established to identify common

job denominators such as skill, knowledge, and/or responsibility. The goal is to create a number of distinct classes or

grades of jobs. Jobs are ranked in their overall order of importance according to chosen criteria. Each job is placed in an

appropriate classification by comparing each job description

against the classification description. This method has the

same diadvantages as the ranking method. It’s difficult to

classify jobs. This method has proven to be successful for millions of jobs in the Federal Government.

Factor comparison (quantitative method)-a select group

of key jobs are evaluated in an organization. They are then

used as the standard. Key jobs should be well known in the

community with established pay rates and represent a crosssection of all jobs to be evaluated-from lowest to highest

paid. It is most important to evaluate the least important jobs

and cover a full range of requirements of each job factor chosen by a committee representing workers and management.

Job criteria are established by mental requirements, skills,

physical requirements, and working conditions.

After key jobs are identified and criteria chosen, committee members rank them based on the established criteria.

These jobs are known as the key job anchors. Next, the committee agrees on a base rate (hourly basis) for all key jobs. The

hourly rate is then assigned a dollar amount per classification

(table 1).

Finally, the committee must compare overall judgments

and resolve any discrepancies. The disadvantages are that it’s

complex, uses the same criteria for all jobs (usually jobs differ

across and within an organization), and depends on key job

anchor points. The advantages are that it requires a set of standard jobs for each organization; it is a tailor-made approach; it
meets specific needs of each organization comparing job and

determines relative value; and it is a logical method.

Point-a group of jobs are classified into identifiable criteria (skill, effort, and responsibility). Points are allocated

depending on the importance of each criterion to performing

the job, appropriate weights are given, points are summed

and jobs with similar point totals are placed in similar pay

grades. Decided next is the degree of skill/responsibility

required to accomplish a job. For example, each job may be

evaluated on the degree of education required to perform successfully, e.g., first degree might require the equivalent of 10

years elementary/secondary education; secondary degree the

equivalent of 4 years of high school, etc. (table 2). This is the

most stable method. Even if a job changes, rating scales stay

intact. This minimizes rating errors. This is a complex method

and is costly and time consuming to develop. Key criteria

have to be clearly identified. Raters must agree on the degree

of importance for each factor; a weight established; and point

values assigned to each degree. Although this method is

expensive and time consuming to implement and maintain, it

is the most widely used method.

Step 3-Developing the plan. Before developing and

implementing plan, the cooperative should assess what positions need to be filled and be familiar with the content of all

Table l-Factor Comparison Method

Job

Mental Skill Physical

Hourly require- require- require- Respon- Working

pay ments ments merits sibility conditions

Dollars

General Manager 13.65 4.00 4.40 1.25 3.00 1 .oo

Off ice Manager 13.40 3.00 4.40 1.80 2.30 1.90

Division Manager 11.10 2.25 3.00 1.80 2.30 1.75

Field Representative 8.65 3.00 2.00 .50 2.15 1 .oo

Sales Representative 8.45 2.25 1.50 1.70 1.10 1.90

7
jobs. Next the cooperative must decide on how to evaluate

each job. Evaluation methods were described earlier.

Standards are then set for each job in the form of compensable factors. These are job dimensions for which the cooperative chooses to pay. Factors include knowhow, problem

solving, and accountability. Once factors are decided, they are

defined, weighed, and broken into degrees and assigned point

values. Job importance or contribution should reflect the

cooperative’s goals and be meaningful to employees in their

own estimations of job worth.

Factors, degrees, definitions, and weights are included in

a job-evaluation manual. The manual should be standard and

include the compensable factors, definition of factor, weight

(e.g., 20 percent out of possible 100 percent), autonomy, complexity of duties, nature of supervision, number of subordinates, contacts and communications, and pressure and volume

of work.

Table P-Example of a point method-sales representative

JOB CLASS: Sales Representative

Factor 1st 2nd 3rd 4th 5th

Degree Degree Degree Degree Degree

Points

Skill

1. Education 22 44 66 88 110

2. Initiative 14 28 42 56 70

Responsibility

3. Safety of others 5 10 15 20 25

4. Work of others 7 14 21 28 35

-----

Total 48 96 144 192 240

8
ESTABLISHING THE PAY STRUCTURE

The pay-setting process involves two major decision

areas. One deals with establishing wage(s) or salary(ies)

attached to various jobs involved (i.e., with the pay structure).

The other establishes pay that each person will receive within

the prevailing structure.

A completed job evaluation may become the foundation

for developing an organization’s pay structure. Wages within

specific communities or other cooperatives, along with job

evaluations, should be considered when setting wages.

Wage Surveys

Wage survey data can be obtained from Department of

Labor’s Bureau of Labor Statistics. It regularly publishes wage

data by geographic area, industry, and occupation. Other associations also conduct surveys they make available to the public. An organization may conduct a wage survey or use surveys from other organizations such as the American

Management Association or the American Compensation

Association to determine the rates other organizations in the

same labor market are paying for similar jobs.

Conducting your own wage surveys has its advantages

because you are not limited in what you can ask. Mailing

questionnaires or personal and telephone interviews may be

used to get survey data. Table 3 shows a comparison of survey

data of wages/salaries to facilitate analysis and interpretation.

Wage Structure

This step includes plotting a wage curve that helps in

developing the organization’s wage structure. For example,

pay grade 1 may range from 0 to 50 points, pay grade 2 from

51 to 65 points, etc. Figure 3 shows this using data from table

3. There is some range overlap.

Generally, organizations design their wage structure with

9
’ Table 3-Example of survey data1

Benchmark jobs

and point values

Jobs Points

Develop pay

grades

Grade Points

Survey data Rate ranges

midpoint

Minimum Midpoint Maximum Adjustments +I- 15 pet.

___________ __________ __________ _____ Dollars _________ ___________________________

A

B

C

D 56

E 58

F 59

G 69 III 65-79 19.500 21,800

H 87 (15,000) (18,100)

I 90 IV 80-94 21,000 24,200

J 91 (17,500) (20,000)

37

45

49

I 35-49 16,100 17,600 19,100 15,500 13,200-l 7,800

(12,500) (14,400) (16,300)

II 50-64 18,000 20,100 22,200 17,400 14,800-20,000

(13,700) (16,000) (18,300)

24,100 19,300 16,400-22,200

(21,200)

27,400 21,200 18,000-24,400

(22,500)

1 Adapted from T.H. Patten, Jr., Pay: Employee Compensation and Incentive Plans (New York: Free Press, 1977).
Figure 3- Wage Structured

Salary range ($000)

40 50 60 70 80 90 100

Grade Pay I 1 GPaadY II 1 G% III 1 Gr%IV /

Pay grades and points

----- average salary

l Based on salary data in table 3. Each point represents minimum,

midpoint and maximum salary per pay grade.

11
ranges in each grade to reflect different tenure in positions

and levels of performance. An overlap of grades allows

employees who reach the top of their grade to increase their

pay only through moving to a higher grade.

When a pay rate is too high, it should be identified as a

“red circle” rate. If this is the case, then the pay is frozen or

below average increases are awarded until the rate is within

the normal range. In some cases a wage rate is higher than

normal but is not “red circled.” This occurs when there is a

need to attract or keep individuals with specific or unique

skills.

The opposite of a “red circled” pay rate is a “green circled” pay rate. This rate depicts an undervalued job with a

wage rate that is too low.

BENEFITS

Benefits are indirect compensation and are included when

examining total compensation packages. Benefits should be

effectively planned, coordinated, and balanced to help meet

the needs and desires of employees and, at the same time, meet

the employer’s compensation objectives. This system should

be designed so the lowest pay structure will motivate and

retain personnel and be perceived as fair by employees, attract

necessary professional employees, provide incentives for

above-average performance, be equitable among employees,

be cost-efficient (no duplication in protection provided), and

enable the cooperative to increase margins and meet social

obligations to employees and the general public.

Businesses may follow a number of avenues when offering benefits. Laws and regulations may govern some aspects

of benefit plans offered. Therefore, benefit management

should begin with examining the business environment and

local and Federal laws and regulations. This is the first step in

developing a total compensation approach that enables the

cooperative to determine precisely how much it can afford.

12
This type of planning can help eliminate open-ended cost

liability for certain benefits and make planners aware of cost

escalation of retirement and health benefits. For example,

health issues spill over from direct medical services into disability, workers’ compensation, and illness-related absenteeism which affects paid time off and productivity.

Retirement

Providing retirement income through the employee benefit mechanism is a common practice. There are several forms

of retirement plans-pension plans, thrift or savings plans,

group individual retirement account (IRA) plans, simplified

employee pension plans, tax-deferred annuities (401k), etc.

The objective of providing retirement income has become

increasingly important because people are living longer and

want to enjoy their retirement years.

The first step for employers is to establish retirement

objectives. There are several considerations an employer must

determine. Factors to consider include the approximate percentages of employees’ pay that go to Federal, State, and local

income taxes (these will probably be reduced after retirement),

Social Security taxes/benefits, age, years of service, or a combination of age and service, and employee income. The next

step is to determine how much the employer is willing or able

to provide.

A pension plan may be qualified or nonqualified. A qualified plan is intended to be permanent, cannot be diverted to

other purposes, and should provide full vesting for employees

at normal retirement age. A business necessity may require

the employer modify or terminate the plan, but it must meet

minimum funding requirements. The pension plan must be an

exclusive benefit of employees and their beneficiaries, cannot

discriminate regardless of job title or pay, must be in writing,

should be primarily for retirement benefits so death benefits

can be included, and must provide determinable benefits with

13
common eligibility requirements (minimum age and/or service, etc.).

Advantages of a qualified plan are:

1. The employer (within limits) can deduct from the tax

liability contributions to the plan as necessary and reasonable

business expenses.

2. Investment earnings on pension plan assets are generally not subject to Federal income taxes until benefits are paid

to retirees.

3. Employees are not taxed on contributions made by

employer until they receive benefits.

4. Avoid income tax to the participant or his/her beneficiary if distributions from a qualified retirement plan are

taken in a lump sum. Qualified retirement plans can be further classified into either defined contribution or benefit

plans. A defined contribution plan provides for an individual

account for each participant. Benefits are based solely on

amounts contributed to a participant’s account, on any

income, expenses, and gains and losses of the account, and on

any forfeitures of accounts of other participants that may be

allocated to the participant’s account.

Defined contribution plans include money purchase pension plans, target benefit pension plans, profit-sharing plans,

thrift savings plans, employee stock ownership plans, and taxcredit employee stock ownership plans. Advantages of this

are that the employer’s maximum cost is fixed, predictable,

and a percentage of compensation; less extensively regulated

under Employment Retirement Income Security Act (ERISA)

of 1974; better understood and appreciated by employees; and

offers greater flexibility in making employees’ account balances available to them during their working years as loans

from the plan or in-service withdrawals from certain types of

these plans.

The defined benefit plan provides participants with a

specified, definite benefit at retirement. A major consideration

14
when using the defined benefit plan is to decide on which

“pay” will be used for pension purposes. A final average pay

plan bases pension benefits for all years of credited service on

salary or compensation within a specified period of time that

is reasonably close to retirement. For example, average salary

over the last 3 to 5 years of service up to age 65 or the 5 years

of highest earnings within the last 10 years of service up to

age 65, etc. A career-average pay plan bases the pension benefit on the employee’s pay during his or her career as a participant. Costs of plan are more predictable and contained during

inflationary periods.

Defined benefit plan advantages are:

1) employer designs pension plan formulas to achieve

specific retirement income targets in a relatively accurate fashion (although it does not seek to guarantee employee participants any specified level of retirement benefits);

2) provides for an adequate retirement income for

employees who are older when the plan is established, or who

are older hires because it is relatively easy for a defined benefit plan to give credit for employees’ past service in its benefit

formula;

3) may relate pension benefits more closely to retirement

income objectives because they can use final average pay benefit formulas that compute pension benefits based on an

employee’s compensation for the years closest to his or her

retirement;

4) employer benefits from favorable investment experience on plan assets; and

5) easier for employers to administer because contributions and investment incomes do not have to be allocated to

individual employee participants. However, there may be

some increased administrative costs for these plans.

The retirement benefit is a stated or fixed factor, while

the contributions to the plan necessary to produce those

15
defined benefits are variable. Four basic types of defined

benefit formulas can be applied to retirement plans:

1) flat amount-provides the same dollar benefit per

month to all employees regardless of age, earnings, and length

of service. For example, all retired employees might be paid a

flat amount of $300 a month (this formula may have a service

requirement);

2) flat percentage of earnings-provides a benefit of 20 to

50 percent of an employee’s earnings, based on employee’s

average earnings or earnings in the last few years prior to

retirement;

3) flat amount per year of service-provides a stated

amount multiplied by number of years of service (based on

specified number of hours) and the employee must receive

proportionate credit (past service) if they worked at least 1,000

hours in a 1Zmonth period; and

4) percentage of earnings per year of service/unit, credit/past and future service-provides retirement based on and

equal to some fixed percentage times the number of years of

credited service (past and future). This formula is used when

adopting a new retirement plan. Therefore, this formula is

used to distinguish between past and future service. Past service credits earn a lower percentage benefit than future service. Future service occurs after the effective date of the new

plan. Some limits can be placed on the number of years of past

service credit that can be granted.

Benefit formulas for a contribution plan may be integrated with Social Security. This plan considers contributions to

Social Security when establishing the retirement benefit. There

are three methods that may be used to integrate Social

Security receipts with cooperative pension plans. The offset

method is calculated regardless of Social Security benefits.

After cooperative retirement benefits have been calculated, a

percentage of a participant’s Social Security receipts is deduct16
ed to determine the actual pension benefit payable from the

private plan.

The excess method considers the benefits or contributions

based on the participant’s compensation in excess of an integration level under the plan. Although the step-rate excess

method is similar to the excess approach, it provides a smaller

benefit payable on earnings up to the Social Security integration level, and a larger benefit payable on earnings above the

level. Some plans use combinations or variations of the three

integration provisions.

A nonqualified plan allows an employer to exercise considerable discretion as to who is covered, permits funding

flexibility, and allows many other flexibilities in the retirement

plan design.

Vesting A final discussion about retirement benefits will be

on vested benefits. Vesting is the nonforfeitable interest

participants have in their account balances under a defined

contribution plan or in their accrued benefits under a defined

benefit plan resulting from employer contributions.

Vesting refers to the right of participants to receive their

accrued or accumulated pension benefits at normal or early

retirement ages, regardless of whether or not they are

employed by the particular employer at that time. ERISA

mandates minimum vesting standards for qualified retirement

plans. The law requires a plan to use one of three minimum

vesting schedules. Which one is left to the employer’s discretion. The three alternative minimum vesting schedules specified in ERISA are:

IO-year vesting-This schedule requires full vesting of all

accrued benefits and/or account balances after a participant

has accumulated 10 years of recognized service. This type of

schedule is known as “cliff vesting.” It is the most common

type of vesting provision and the least costly for employers.

5to-15 year vesting-This minimum standard applies to

the graded vesting concept. The percentage of all accrued ben17
efits and/or account balances that are vested increases with

employee service according to some graduated scale. At least

25 percent of a participant’s accrued benefits and/or account

balances must be vested after 5 years of service, another 5 percent each year for the next 5 years, and then a final 10 percent

each year for the following 5 years. Benefits are fully vested

after 15 years of recognized service.

Rule-of-45 vesting-Under this minimum vesting schedule, accrued benefits and/or account balances of participants

with 5 years of service must be 50 percent vested when their

attained age and years of service equal 45. For any subsequent

years, an additional 10 percent of all benefits are vested until

reaching 100 percent vesting. Benefits must be 50 percent vested after 10 years of service with a 10 percent additional vesting for each year of service after that.

Unemployment Plans

The labor market continuously changes and adjusts.

People move among three categories-employed, unemployed, and out of the labor force (fig. 4).

The unemployment compensation system resulted from

the Great Depression of the 1930s. Its purpose was to provide

a period of income for eligible workers temporarily unemployed through no fault of their own. Today, the system still

deals with problems of unemployment.

Following are some major types of unemployment:

1) Cyclical unemployment-Relates to the business cycle

and occurs during the downturn (recession or depression).

The Federal-State unemployment compensation system acts as

an automatic stabilizer. A business cycle downturn causes

increased unemployment and the payment of unemployment

compensation benefits without further governmental action.

This system is also considered countercyclical. During a

downturn, the system pays out more benefits than it collects

18
Figure a- Labor Force Flows

B(I

.

1

r

Employed

Unemployed

19
downturn, the system pays out more benefits than it collects

in taxes, while the reverse is true during recovery.

2) Frictional unemployment-This kind is always present

and involves the time it takes for workers to move from one

job to another.

3) Structural unemployment-Tends to be long-term and

results from changes that affect certain workers or categories

of workers in the economy or business climate.

4) Seasonal unemployment-This type is common in

agricultural industries with peak harvest-time labor demands.

5) Personal factors unemployment-Results from discrimination against certain racial, ethnic, or other groups.

Other factors may be lack of marketable skills, poor work

habits, lack of job-getting skills, and other similar employment

hindrances.

6) Secular or long-term unemployment-This results

when the economy does not expand fast enough to absorb all

the new entrants into the labor force.

Certain criteria entitle workers to be eligible for unemployment benefits. These are: employees who were paid

wages of $1,500 or more in any calendar quarter or at any time

worked 20 calendar weeks; those available but unable to

work; and those actively seeking work. Benefits are generally

paid weekly. The amount is determined from a claimant’s

earnings and employment during a base period (the first four

of the last five completed calendar quarters prior to the

claimant’s benefit year) of employment.

The amount of benefit is a formula tied to wages during

the base period or some portion of that period and multiplying a fraction by the claimant’s earnings during the quarter of

the base period in which the claimant’s earnings were highest.

For example, if a claimant had worked all 13 weeks of his or

her high quarter, the l/26 fraction would produce a weekly

benefit equal to about 50 percent of earnings. All States provide for minimum and maximum weekly benefit amounts.

20
Health Insurance

Health insurance wasn’t established until 1929. At Baylor

University Hospital in Texas, Blue Cross developed a plan to

cover a group of local school teachers. The first hospital and

medical insurance plans were limited in what they offered.

Hospital care was for a specified number of days and was

based on flat-dollar amounts for a list of surgical operations.

Maternity benefits were seldom offered. Today, most employees see medical and hospital insurance as a “real” benefit even

if they never use it.

Health insurance is a current benefit-useable at any

moment. Health insurance is generally offered to the employee, the spouse, and dependents. It was originally considered a

benefit. Employees often paid part of the premium.

Although it is becoming more common for employers to

pay the full cost after a month or less of service, most costs are

shared by the organization and the employee. Another way to

share costs are deductibles and coinsurance or copayment.

Deductibles are a way to increase the percentage of the costs

of health care paid by employees. Coinsurance or copayment

is another common cost-sharing technique. Often, the plans

pay a fixed percentage and the patient covers the balance.

Most health plans have maximum coverage.

Most health protection plans fall into two categoriesauxiliary health services (dental, vision care, and prescription

drugs) and preventive health programs (physical examinations, “wellness” programs, and employee assistance programs).

Varied services are covered by health plans. Surgical

bills, anesthesia charges, doctors’ hospital visits, x-rays, emergency-room treatment, intensive care, private nurses, ambulance service, blood transfusions, oxygen, casts and splints,

and other expenses can be paid for by health plans.

21
Life Insurance

Life insurance was one of the first benefits employers

offered their workers. Term life insurance usually depends on

the employee’s direct pay and is noncontributory. This is the

simplest and cheapest variety. It will pay only a fixed amount

to the beneficiary in the event of the employee’s death.

Most group life insurance policies allow survivors to

maintain their standard of living, although this isn’t very realistic. This “survivor’s benefit” helps, but in itself cannot maintain much of a standard of living for very long. Many group

policies also permit employees to cover spouse and children

with separate life insurance.

Disability Insurance

Disability insurance began with the European guilds and

fraternal societies. They were often set up to care for members

afflicted with a crippling disability, commonplace in that time.

There is a gray area surrounding disability. The definition of “disability” is vague. Does it mean not being able to

work at your regular occupation; being unable to work at a

similar but less physically demanding job for which you are

qualified; or being totally unable to work? Disability during

the first 2 years is defined as being unable to do your regular

job. After 2 years, benefits end if you can physically perform

some other job for which training and experience have prepared you. Some disability programs may provide for rehabilitation and/or retraining workers for new jobs that will take

them off the disability list.

Although seldom used, disability is one of the most

important benefits, but in most cases it is listed as optional. It

protects a group of people, at very low cost, against a potentially devastating disaster to one of them. Administration is

relatively simple, although the few claims that do occur may

involve complex medical ramifications and long-term payment responsibilities and monitoring.

22
The disability premiums are relatively modest and organizations pay the entire premium. The insurance can also be

paid in full by the employees who want this kind of coverage

or the employer and employee may split the costs. Monthly

benefits are usually directly related to the salary the employee

was making at the time of disability. The monthly amount is

calculated as a percentage of pay. Sixty percent is the most

common. Coverage usually continues as long as the disability

does or until the disabled employee is eligible for benefits

from the organization’s pension plan.

Some organization disability plans may have to be coordinated with other disability programs-Social Security’s disability insurance, State disability programs, and workers’

compensation. This is done to make sure that someone doesn’t

obtain benefits from several sources that together are more

than 100 percent of what the previous salary had been.

Paid Days Off

Paid days off are a standard practice and probably the

most cost-effective benefit of them all. Paid time off may

include sick pay/short-term disability, holidays, and personal

time off/vacations.

Sick Pay/Short-term Disability Eventually, almost every

employee will use sick pay. An allotted number days of sick

pay is given for a specified time period. Unused days can be

carried from year to year, or a use-or-lose policy may exist.

The amount of sick days allowed is generally linked to the

length of service.

Holidays Most employees take holidays for granted. The

United States has six national holidays-New Year’s Day,

Memorial Day, Independence Day, Labor Day, Thanksgiving,

and Christmas. Others sometimes offered include the

birthdays of Washington, Lincoln, and Martin Luther King

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plus Good Friday, Columbus Day, Election Day, and Veterans’

Day. Other paid days may include jury duty or death of a

family member. In most cases, employees must have worked

the day before and the day after the holiday to establish

holiday pay and prevent abuse.

Vacations Primarily, vacations are used by employees as a

time to enjoy, rest, relax, and “get away” from the pressures of

work. Sometimes employees use vacations to handle family or

personal problems. It is important that the vacation policy be

clearly understood by everyone.

The amount of vacation time earned depends on length

of service. The cost of vacations to employers may vary

depending on how work is done while employees are on vacations. For some job categories, businesses must hire substitutes or pay overtime. Other jobs may provide services at distinct periods of time so employers have flexibility to be

without such employees during vacations. In some cases,

employees may complete work before or after their vacation,

making the true cost of vacations close to zero.

Educational Assistance

Educational assistance comes in many forms. Under

tuition reimbursement, all or part of the expense of job-related

educational courses taken by employees are refunded or

repaid by the employer.

Here are some questions to answer when setting up a

tuition-based reimbursement plan: 1) Should all or part of

tuition costs be paid? 2) Who should pay for fees and books?

3) Should courses be limited to job-related skills? 4) Should

limits be made on course loads or total dollar amount of

tuition? 5) Should student be required to achieve a minimum

grade in course? 6) Should program include paid time off

when needed to take courses available during work time? 7)

Who approves classes for employees? 8) What are objective of

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program (maintain present skills or increase employee productivity and promotability)? and 9) Who’s eligible? Tuition

reimbursement can be a benefit that attracts ambitious young

people because it provides a way to begin a career and also

continue an expensive education.

Other forms of educational assistance are financial backing to a college scholarship program or educational loans for

the children of employees. In-house courses are another form

of educational assistance. They make use of the organization’s

own resources. Classes are taught by qualified organization

personnel or outside instructors and usually on the organization’s premises.

Evaluating the Employee Benefit Plan

Employee benefits are increasing faster than direct pay.

This can become a problem for some small cooperative businesses. Therefore, benefit planners should consider several

factors in developing benefits programs-employee needs and

expectations, cost escalation, tax considerations, benefit quality, and actions of competitors.

When designing and evaluating benefit plans, emphasis

should be placed on employees’ needs rather than on compensation. Benefits should be competitive with other organizations in the same industry and/or with others in local labor

markets, consistent, and coordinated to prevent duplication.

They should contribute to employees’ morale, attract and

recruit to meet personnel and recruitment objectives, satisfy

legal requirements, and satisfy the employees’ needs.

There should be some balance when planning benefits to

meet the needs of both the employee and employer. For example, a large, well-established employer in a growing mature

industry may take a relatively liberal approach to employee

benefits. In highly competitive industries or those beset with

cyclical fluctuations, employers may not be willing to add to

their fixed costs by adopting liberal and costly employee ben25
efit programs. Each organization must determine the relationship between benefit costs and employee compensation.

Subsequently, benefits should not consume so much of the

total income that they interfere with provisions for adequate

direct pay and operations.

There are two major benefit philosophies: 1) the compensation-oriented benefit philosophy relates employee benefits

primarily to compensation, in that benefits follow compensation level; and 2) the benefit-oriented (needs) philosophy that

focuses on employee needs rather than compensation. Most

employee benefit plans are a compromise. For example, group

life insurance and pension benefits are related to compensation. Medical expense benefits are related to needs.

Several questions should be resolved when planning a

benefits program: How does a cooperative choose what benefits to be provide? Who will pay for the benefit? Which dependents of active employees should be covered? Should

retirees/spouses/dependents be covered? Should survivors of

active/retired employees be covered? What coverage, if any,

should be extended to persons on disability? What coverage

should be extended for laid-off employees? Should coverage

be limited to full-time employees?

These can be answered through questionnaires and interviews of managers and/or employees; monitoring benefit

activities of other organizations; using probationary period for

new benefits; looking at employee participation in various

benefit plans; through Government agencies; and reading benefit publications.

Finally, no matter how carefully a benefit plan is assembled, it should be flexible. As things change-cooperatives,

the economy, and people-benefits must also change to match

evolving circumstances. The biggest challenge to cooperatives

is to constantly review and revise rather than just incorporate

or add new plans. Ways a cooperative manages benefit plans

are:

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1. Stay up-to-date-A cooperative can’t exist in a vacuum, but be aware of outside influences and deal with situations as they arise. Some outside influences include competition, community, Government, and the economy.

2. Get feedback-A cooperative should stay in touch

with employees’ feelings about certain benefits. A cooperative

may accomplish this effectively by conducting a formal survey. Sometimes, however, this is not the answer, since a badly

designed survey may produce inaccurate information. Panel

discussions and focus groups can also be used to assess

employee benefit preferences.

3. Plan ahead-Careful planning ensures that certain

benefits are monitored, thereby keeping abreast of changing

times and shifting conditions. This can be done by establishing goals-know the goals of the cooperative; know what benefits will accomplish those goals; and know what specific benefit plans will do that job best. Next, mesh the cooperative’s

basic benefit objectives together with specific benefit plans

and attitudes of employees toward the benefits they receive.

Designing Employee Benefit Plan

The trend is toward giving employees more flexibility in

choosing their benefit plans. Benefit designs a cooperative

may choose to offer employees are:

1) traditional design with minimal employee options-a

fixed pattern provided to all employees without much choice

in benefit levels or composition; based on what management

thinks would best satisfy the needs of the “average” employee

with little variation.

2) traditional design with certain employee options-a

fixed pattern of benefits that allows employees some choice

within established benefits. Employees may choose types and

levels of benefits within the existing programs paid all or partly by the employer.

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Some choices may include optional levels of supplementary group term life insurance, death or disability benefit

under pension or profit-sharing plans, group medical expense

coverage for dependents, an Health Maintenance

Organization (HMO) option, section 401(k) cash or deferred

election, cash distribution, investment options under profitsharing, thrift, and capital accumulation plans. Employer’s

make such benefits available to employees at favorable group

rates. Some benefits are purchased by employees from

incomes after paying Federal income taxes.

3) “cafeteria” compensation-a flexible benefits program

permits employees to choose on a before-tax basis among various levels and forms of certain nontaxable benefits and cash

compensation, subject to an overall maximum amount. This

plan offers the most flexibility in employee benefit plan

design. Employees can tailor a benefit plan most relevant to

their own particular needs-changing the structure of their

benefits to meet needs over their life cycles. The plan may also

increase the value and appreciation of benefit programs by

employees; improve employee morale and performance; boost

economic efficiency of the allocation of employer compensation expenses resulting from greater choice; and involve

employees and families in selection of benefits, increasing

their understanding and appreciation of the benefits and their

cost. A flexible plan can provide the potential for the control

of future benefit costs.

In terms of disadvantages, employees’ perceived needs

may vary from actual needs and lead to unrealistic choices

among benefits; complexity of plan and related administrative

expenses may increase; benefit costs (and the cost to implement them) may climb; greater “adverse selection” may result

from employees who choose popular benefits but ones that

the cooperative may not be able to sponsor; problems may

occur regarding insurance group underwriting requirements

and practices; and employees may simply be unable or

unwilling to make the correct choices.

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Financing Benefits

Benefits can be financed three ways: 1) Noncontributory

where employer pays all. Advantages are: all eligible employees are covered; tax efficiency; group purchasing; avoids

employee dissatisfaction with payroll deductions; ease and

economy of administration; and possibility of greater employer control of plan. 2) Contributory where employer and

employee share costs. By contributing to financing, employees

gain more coverage and/or higher benefits; employees have a

greater appreciation of the plan and won’t take benefits for

granted; less abuse of benefits; more effective use of employee

benefits; options for employees; and encourages self-reliance.

3) Employee pays all of costs. The advantage of the contributory and employee-pay-all methods is that it lessens the financial burden of the cooperative.

SUMMARY

Cooperatives need to set realistic benefits and salaries for

their employees. At the same time, benefits and salaries

should attract the type of workers the cooperative needs.

There are no set guidelines.

All businesses must consider certain factors. They may

result from external influences like the labor market; Federal

and State Government policies and regulations; competitive

background; internal factors like expenses of the cooperative;

educational background of employees; skill; physical ability

(required by job); and experience of the employee.

There are tools available in developing equitable pay

structures. Job evaluations may be developed through ranking, classification, factor comparison, and point. Each has

advantages and disadvantages.

Benefit plans must be evaluated. Benefit planners should

consider employees’ needs and expectations, cost escalations,

tax considerations, benefit quality, and actions of competitors.

Each cooperative must answer questions. What benefits

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should be offered and how financed? What conditions must

be met before an employee is eligible for benefit? These questions can be answered through employee interviews, monitoring benefit activities of other area businesses, Government

agencies, and reading benefit publications.

Some benefits cooperatives may offer their employees

include retirement, health insurance, life insurance, disability

insurance, paid vacations, holidays, sick pay/short-term disability, and educational assistance.

Cooperatives must use all available resources in deciding

what salaries and benefits will be offered. Job evaluations,

Government agencies, other area cooperatives, employee

interviews, etc., are some of the resources cooperatives must

consider in developing an equitable salary structure and

maintaining a balance between needs of the employee and the

cooperative.

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APPENDIX

References

DeCenzo, David A. and Stephen l? Robbins.

Personnel/Human Resource Management. Prentice Hall.

Englewood Cliffs, NJ 07632.

Foster, Jr., Ronald M. The Manager’s Guide to Employee

Benefits. Facts on File Publications, New York, NY. Oxford,

England. 1986.

Henneman, Herbert G., Donald l? Schwab, John A Fossum,

and Lee D. Dyer. Personnel/Human Resource Management,

Richard D. Irwin, Inc., Homewood, IL 60430.1983

Rosenbloom, Jerry S. and G. Victor Hallman. Employee

Benefit Planning. Prentice-Hall, Englewood Cliffs, NJ 07632.

Wald, Robert M. “Compensation at Cooperatives.” The

Cooperative Accountant, Vol. XLII, Number 4, Winter, pp. 16,

17, and 18.

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U.S. Department of Agriculture

Agricultural Cooperative Service

P.O. Box 96576

Washington, D.C. 20090-6576

Agricultural Cooperative Service (ACS) provides research,

management, and educational assistance to cooperatives to

strengthen the economic position of farmers and other rural

residents. It works directly with cooperative leaders and Federal

and State agencies to improve organization, leadership, and

operation of cooperatives and to give guidance to further

development.

The agency (1 ) helps farmers and other rural residents develop

cooperatives to obtain supplies and services at lower cost and

to get better prices for products they sell; (2) advises rural

residents on developing existing resources through cooperative

action to enhance rural living; (3) helps cooperatives improve

services and operating efficiency; (4) informs members,

directors, employees, and the public on how cooperatives work

and benefit their members and their communities; and (5)

encourages international cooperative programs.

ACS publishes research and educational materials and issues

Farmer Cooperatives magazine. All programs and activities are

conducted on a nondiscriminatory basis, without regard to race,

creed, color, sex, age, marital status, handicap, or national origin.