Komo, Inc. Comprehensive Benefits Package

Komo, Inc. Comprehensive Benefits Package

Employees are the lifeblood of any company. Experienced employees are more valuable because they are past the learning curve and represent the most productive members of the working staff. Retaining experienced employees represents a critical strategic move that can have excellent payoffs in the end. Experienced employees make fewer mistakes and often represent the most efficient workers. Training new employees costs money and it often takes time until they become proficient at their jobs. These are only a few reasons for the necessity to attract quality workers and then take positive measures to keep them for the long haul.

Kokomo, Inc. has plans to expand its Flooost forming production to include Flooost formers from an international employee base. As a result of this expansion, it is necessary to revise the current benefit package for all employees so that Kokomo, Inc. will be able to attract the most qualified Flooost formers from around the globe. The new benefits package will also help to retain existing staff and reduce the current turnover rate. The following outlines the new benefits package and implementation of it.

Budget

In accordance with a mandate that the budget shall not exceed 30.50% of the entire payroll budget. This places a budgetary cap of $575,687.50 for the entire employee benefits package. This includes retirement, Workman's Compensation, and Social Security for all employees.

Employee Demographics

Kokomo, Inc. has 30 full time employees. The top four positions are held by the two major shareholders, Sally Toon and Eileen Toon, the president and CFO. The company has two upper managers, one for each shift of production. The company also employs an Administrative Assistant, Artist and Webmaster. The company employs eight valuable flooost formers. The remainder of the employees are grunts and perform various tasks as needed. The following charts summarize the employee demographics of the plant.

The plant is relatively equally weighted in terms of gender. Employees are divided into nine different groups according to job title. Of these, the largest employee group consists of grunts, with 13 grunts in the entire plant. Flooost Formers are the second largest group of employee class.

The median age is 45.5 years of age. Ages range from 19-69 years of age. The average age is 43.4 years of age. The mode is 28 with two employees falling into this age category. The following chart summarizes the age ratios of the company for all employees.

The most notable characteristic of the employee population is that there are three employees that are already past the retirement age, including one Flooost Former. A majority of the employees are in the 31-50 category and must be concerned with saving for retirement. The average population of the plant is middle aged, with several within 6-7 years of retirement. These employees. It would be safe to say that the plant's attrition rate will rise rapidly in the next 6-7 years as a result of a high population of older age employees that are approaching retirement age. This will be an important factor in planning the benefit package.

Choices for benefits such as health care, dental care, and other similar types of benefits depend on the number of people that comprise each family unit. The following summarizes employee marital and dependent status.

The following chart extrapolates the previous chart, with attention to the number of dependents.

As one can see, the number of employees with dependents exceeds the number of employees without dependents. Therefore, it is likely that if given a choice, these employees will most likely choose the lowest cost option for those with 1-2 dependents).

The employee population at Kokomo, Inc. can be summarized as a diverse population with a majority comprised of middle-aged employees with dependents. However, there are number of employee categories that when combined, make up the clear majority of employees. Many of the lower salary employees have dependents to support, therefore are likely to choose the cheapest healthcare option available. It is hoped that these employees are thinking about retirement, therefore the plan must include an adequate, but affordable retirement package for these employees.

Analyzing Benefit Options

The primary purpose for choosing a new benefit package is to help retain valuable flooost formers. A majority of the employees are low-wage grunts. The focus of the benefits package will be on the primary shareholders of the company and the flooost former class of employee. Grunts are easily replaced and the company has a large local population of low wage employees from which to draw more low-skilled workers. However, to be a flooost former requires a specific type of skill that goes beyond the average member of the local population. Flooost forming is a highly skilled trade that requires years of training and an eye for perfection. The production of quality flooosts is dependent upon the ability to find and retain highly skilled flooost formers. Therefore, the focus of the benefits package will center on the ability to attract and retain highly-skilled flooost formers.

The entire benefits budget has a cap of $575,687.50 for the entire employee benefits package, as calculated by the sum of all employee salaries. From that, we must deduct benefits overhead of $22,500, leaving an actual budget of $553,187.50. Workman's Compensation requires ad addition 2.1% of payroll, as insurance against on the job injuries. When calculated from the total payroll, this amount totals $39,637.50.

Next we will calculate Social Security. There are two types payroll deductions for Social Security. The first is Old Age Survivors and Disability Insurance (OASDI) and Medicare Part a. This portion is 6.2% on the first $87,000 taxable income earned by an employee. An additional payroll tax rate of 1.45% is added to this amount, totaling a total payroll deduction of 7.65% (SSA, 2008). The net Result is that the first $87,000 is taxed at a rate of 7.65%. Any amount in excess of this is taxed at 1.45%. It has been determined that the amount deducted for social security should be included in the amount allowed for benefits. The total deducted for Social Security is $106,697.75.

Retirement Plan

When one deducts, overhead, Workman's Compensation and Social Security, it leaves a total workable budget of $406,852.30. A Retirement plan is a necessity, as mandated by upper management. Therefore, this will be the first item to be determined in the new benefits package. There are several types of retirement plans offered by employers, according to the U.S. department of labor (2008). The first type is the defined benefit plan. This type of plan promises the employee a fixed amount of monthly income after retirement. This type of plan uses a formula that may include salary, age, and number of years worked at the company. This type of benefit plan rewards employees for the number of years they were with the company, encouraging them to stay with the company. They longer they are with the company, the more they will get at retirement.

The second type of benefit is the defined contribution plan. This type of plan does not promise a specific plan at retirement, but represents shared contributions into individual accounts (U.S. DOL, 2008). The employee contributes a certain percent and the employer contributes a certain percentage. The employee received this amount at retirement. How much the employee receives depends on how well the investment performs. This is risky and the employee is not guaranteed of a return. The potential for gain is greater than with the fixed plan, but the potential for loss is greater as well. This may not be the best option for employees that are close or that have already exceeded retirement age. It does not encourage longevity at the plant, unless there is a program where the employee becomes vested after a certain amount of years, or if the employer contribution increases over time.

The goal of the new benefits plan is to increase longevity of the employee at the plant, therefore, this will be a key factor in the retirement plan chosen. Setting the sights of the employee on the future will be the best way to ensure that they are thinking about long-term employment with the plant as well.

One of the most difficult tasks in designing any benefits package is that every employee has different needs. The same is true of the retirement package. It is assumed that older employees, particularly those that are already past retirement age already have substantial retirement savings, either from previous employment or from Kokomo. These employees will be offered a different retirement package than those that are in the lower age categories. These employees need to focus on saving for their later years.

Older employees (57 or older) will be offered $100.00 per month in a defined benefit plan. This will affect seven employees and will amount to a total maximum of $8,400 per year. Employees from 19 to 56 years of age will be offered a 401(k) plan with matching up to 5% of the base salary before contributions are deducted. Funds will be managed by Prudential Financial Services for maximum benefit to the employee (Prudential.com). Prudential offers a number of retirement products for employees to choose from and they have a proven track record for positive fund management.

In order to encourage long-term employment with the company, employees will not be fully vested in their contributions until they have been with the company for a full five years. The percentage of investiture will increase by 20% every year until the employee has reached the five-year mark. The amounts reflected in the represent the scenario where every employee is fully vested, with the company responsible for covering the entire amount.

Employees will be encouraged to begin aggressively saving for their retirement early. If employees in the investment age group contribute their maximum and the company must match its 5% then the contribution amount would be $74,937. This amount must set aside from the budget to prepare for this scenario. It is not expected that every younger employee will take advantage of this offer, but the funds must be available just in case they do. After funds are set aside for retirement benefits, the total amount left for other benefits is $323,515.

Life Insurance

Life Insurance is an important part of retirement and life planning, especially for those employees with spouses and dependents. Kokomo, Inc. has access to life insurance at the rate of $0.13 per $1,000.00 of coverage per month. It is suggested that the employee have at least one year of life insurance coverage at their annual base pay. Employees will have the option of enrolling or not enrolling, as they see fit. For those that choose to enroll, the amount will be deducted from their pay after taxes. Although, free life insurance is an excellent benefit, it is an individual decision. The company will offer excellent coverage, but it will be up to the employee to elect to pay for it.

Health, Dental, Vision

Maintaining proper health is an important part of maintaining productivity. Offering a health, dental, and vision plan is considered a standard benefit. Companies that do not offer these basic benefits are not likely to attract or retain employees. Expenses for individual polices are astronomical and it is not expected that employees will be able to pay for individual policies. Good health coverage can be an excellent benefit used to attract and retain valuable employees.

The company currently offers three levels of health care coverage that the employee can use to cover their needs. Employees can choose the type and level of coverage that best suits their circumstances. The company offers Basic plus Major Medical, HMO and PPO. The price for coverage increases according to the number of dependents.

The following chart represents the worst case scenario, in terms of company contribution. This is subject to change, as employees leave and are replaced with employees that have different numbers of dependents. The following represents a worst case scenario, but will not be likely to represent realistic plan choices. However, the company must plan for the worst case scenario in terms of expenditure. If this case does not occur, the company will have a budgetary surplus, rather than a shortage. The most expensive plan is the Basic plus Major Medical. Therefore, this level will be used to calculate the worst case scenario.

A emp w / no dep #emp w / 1 Dep #emp w / 2 Dep #emp w / 3 Dep Total Basic Plus MM 15 7-4-4-30 Cost Per Employee $310 $428 $687 $928 $4,650 $2,996 $2,748 $3,712 $14,106

This chart makes several assumptions. The first assumption is that single employees with a domestic partner do not have to provide coverage for their partner. This does not fall under the same category as a married spouse, who must provide coverage for their spouse. It also assumes that spouses of married employees do not have primary coverage of their own. These assumptions represent the worst case scenario in terms of expenditure for the company. This is a conservative estimate in terms of risk and is not likely to represent actual numbers. However, the company must prepare for the worst case scenario and have the funds set aside, just in case it should happen.

The budgeted amount does not include the amount contributed by the employee, which may affect the plan chosen. It only takes into account the amount that the company is responsible for, should every employee choose the most expensive plan. Out of pocket costs are constant for the employee in this case scenario. All of these plans offer various deductibles and co-pays. Every plan offered includes diagnostics and wellness screenings for each family member.

This health insurance plan is highly competitive, as the cost to the employee remains constant. They can choose the amount levels and amounts of coverage that are appropriate for their particular scenario. Low cost health insurance has been demonstrated to represent an attractive incentive for employees to join and stay at a company. A recent Harris Poll indicates that a decrease in health insurance coverage is worse than a plan that include no pay increase (Harris Poll, 2003). One of the reasons for these findings is that uncovered health care costs are rising astronomically. Uncovered health care costs could represent astronomical financial risk to the employee, particularly those in the lower income categories. Kokomo, Inc.'s health care plan has been ranked as one of the most competitive in the area and has been found to be a major reason for employees wishing to work for this company. Therefore, no changes are proposed for the health care plan.

Currently, the company makes employees pay for dental and vision care plan maintenance costs from their own pocket. The choice to enroll in these programs voluntary. Many employees choose not to enroll for reasons of cost. None of the lower tier employees are enrolled in the dental and vision plans. A recent survey indicates that the key reason is that the reduction in weekly pay is too great to bear. In order to remedy this, the company will offer free dental and vision care for all employees. The costs of such care are as follows.

Single Policy

Plan Cost Family Policy Plan Cost Total Dental 14 $23/month 16 $67/month $1,394/month Vision 14 $14/month 16 $31.97/month $717/month Cost per Month/employee $2,101/month Cost per year $25,218/year

Under the current plan, many employees have chosen to elect not to be covered. As a result, many are not receiving the required proper dental and vision care that they need. When an emergency arises in these areas employees are often stressed by the financial burden. The total costs to cover all of the current employees at no cost to them is $25,218 per year. This is a minor amount for the company, but represents huge benefits to the employee. A recent employee poll indicates that offering free dental and vision care would represent a major incentive to remain with the company for an extended period of time.

Other health and Wellness Programs

Employee surveys indicate that health and wellness is a top priority for the Kokomo, Inc., employee. In addition to basic health, vision and dental programs, there are a number of other wellness related programs that may be of benefit to the employee and that would increase employee retention.

In addition to the regular health plan, which primarily covers incidents such as illness or accident, the company also has at its disposal a wellness program that includes free annual health screenings for conditions such as diabetes, high blood pressure, and cholesterol levels. This plan includes allowances for gymnasium discounts and other programs that go beyond basic illness prevention. It is believed that these programs are an attractive incentive for employees.

We also believe that employees that are in excellent health are more productive. Evidence indicates that employee health means real dollar amounts in terms of productivity (Pilette, 2005). According to this same study, employee assistance programs (EAP) also represent positive revenues for the company due to decreased absenteeism and productivity losses (Pillette, 2005). Research demonstrates that employees that are healthy and happy represent real increases in productivity, both due to decreased absenteeism and by increased productivity while on the job. Therefore, the company will cover the expenses for an EAP program, Wellness Program, and Prescription Drug Program. The costs for these programs are as follows.

Program Cost per employee/month # employees Cost/Month Annual Cost Wellness $24-30 $720 $8,640 Prescription Drug $57-30 $1,710 $20,520 EAP $17.50-30 $525 $6,300 Total $35,460

These costs are considered to be negligible, compared to the benefits of productive, happy employees. Full coverage will be offered to all employees, regardless of classification or longevity. This is expected to be a major attraction for employees to remain with the company. Employees need to feel that the company cares about them and their well-being. Providing these benefits for free will demonstrate good-will towards the employees. This is expected to increase their dedication and loyalty to the company. In addition, it helps to reduce major reasons for absenteeism by resolving problems at their root.

Providing the employees with excellent health care that goes beyond the basics is a good investment that will have a double benefit for the company. Employees are more likely to have the perception that the company cares about them and their well-being. The company will receive financial benefits through increased productivity, lower turn-over rates, and few expenses due to absenteeism. These benefits represent a major expense for the company, but the company will also receive many benefits in return. It is expected that the costs of these programs will be offset by decreased losses and increased revenue in other areas of the general budget.

Group Legal

In addition to health care costs, legal expenses represent another financially devastating occurrence in life. Many of the employees are not of such an income level that they would be able to bear the expenses of legal proceedings. Divorce rates are rising and things happen such as automobile accidents, property disputes, and product liability suits. Lawsuits are a part of our society and there is little that can be done to prevent them in many cases. Group legal insurance is an attractive benefit that could increase retention among employees.

This insurance would cover only the legal expenses of a case and would not be used in case of a judgment against the employee. In addition, it would have certain limitations. For instance, it could not be used by the employee to cover legal expenses to sue Kokomo, Inc., or any other employee of the company. In the case of a criminal suit involving drugs, violent crimes, or occurrences such as robbery or vandalism, expenses would only covered if the employee were found innocent. Kokomo, Inc. does not condone such acts and will not pay for the costs associated with such acts.

Group legal insurance policies would have to be carefully written so that they only cover routine proceedings and do not place the company under any additional risk for liability. Kokomo, Inc. stands behind its employees and has sufficient screening processes to ensure that they are likely to represent the best citizens of the community. Group legal insurance represents another gesture that demonstrates company good-will towards its employees and their good faith. The costs for such as plan would be $18.00 per month for each employee. This represents a total expenditure of $6,480.00 per year. This is considered to be a negligible sum in relation to the returns in employee loyalty.

Direct Budgeted Expenditures vs. Indirect Benefit expenses.

Thus far, the benefits discussed represent items that represent a direct cost to the company. The company must pay for these items directly from the general payroll budget. In addition to the above expenditures, the company will have to pay FSA administration costs of $4.78 per employee each month. This represents an additional $1,720 dollars per month. Thus far, expenditures are related to standard benefit package items. Without these standard benefits, employees are unlikely to work for the company at all.

Increases in pay can represent a significant employee incentive. However, if the pay increases are offset by increasing expenditures, the employee will feel the effects of a net loss. This will result in decreased loyalty among employees and will represent a negative, instead of a positive in terms of employee retention. Thus far, direct expenses have been minimal as far as the overall budgeted amount is concerned. There are two ways to approach this scenario. The first is to pay for more expenses, thus reducing the employee's out of pocket expenses even further. For instance, the company could offer to pay for the employee's portion of the health care costs.

However, covering even more of the expenses would mean a lower benefit budget. Currently, the benefit budget is at approximately 50% of the maximum allowable benefit budget. Costs are expected to rise in the future. This money could be set aside to provide for regular salary increases to help offset future rising prices. As health care expenditures increase, more money will have to be available to help prevent the impact from being felt by the employee. This is a conservative measure, but one that could have great benefits in the future. The budgetary savings could be invested so that they grow and provide more money to cover increasing costs in the future.

Direct costs will continue to rise and represent an additional budgetary expense to the company. However, there are other benefits that do not represent a direct costs to the company, as they are already included in the regular payroll budget. Payroll is calculated as if the employee works 40 hours a week, 52 weeks per year. This money is already a part of the payroll budget, which presents other possibilities to provide benefits that do not directly affect the budget as a regular monthly expenditure.

Benefits such as disability, vacation time and holiday pay represents budgetary items that provide the employee with time, rather than money. The company incurs a loss anytime the employee is not on the job being productive. However, humans are not machines and need some time to relax in order to stay healthy. Providing opportunities for some free time without risk of losing pay is an excellent way to attract and retain employees.

The philosophy behind benefits that provide pay for times when the employee is not directly involved in the production of sellable product is considered to have the benefit of helping the employee retain better mental health and to avoid burn-out. Employees need a mental break and companies must realize that this type of break makes them more productive when they are on the job. The in-direct expense of providing pay for an employee to take a break is offset by the increased productivity, including reduced mistakes, while on the job. Therefore, paid time off is considered to be a negligible expense, compared to higher turnover rate and defective Flooost production.

In-direct Expense Benefits

Disability

The maintenance of safety standards and general employee health is the primary concern for employees. It is believed that the primary focus should remain on keeping employees healthy and safe. However, realistically, there will be circumstances that are unavoidable and that result in long-term lost time due to illness or injury. Disability is an optional benefit, but it is one that demonstrates a long-term commitment to employees, their families, and their general well-being. Employees must feel this type of long-term commitment form the company. They must feel that the company has their long-term interests in mind. Disability pay is one way to help provide this sense of long-term stability and financial interest.

Short and long-term disability represents a portion of funds that are already set aside in the payroll budget. However, disability pay represents pay that the company is not recovering in terms of production. This expense is not a direct expense that must be paid on a monthly basis, but is an indirect expense in terms of lost production. Disability demonstrates to the employee that they are valuable and that their bests interests are at the heart of the company.

The company will offer both short- and long-term disability if the employee meets certain criteria. Short-term disability will cover illnesses or injuries ranging from 13-52 weeks. Long-term disability covers illnesses or injuries that will prevent the employee from working for a minimum of three-month, up to one year. The following rates will apply to short- and long-term disability.

Short-Term Disability 13 weeks $.30/10 of weekly income 26 weeks $.42/10 of weekly income 52 weeks $.65/10 weekly income Long-Term Disability 3 months $.57/1000 of weekly income 6 months $.47/1000 of weekly income 12 months $.37/1000 of weekly income

Although, at first it may appear that short- and long-term disability payments do not have a significant impact on the company, as the amount paid was already a part of the payroll budget, it still represents lost production. It is more than likely that the company will have to hire a temporary replacement for the employee. This employee will have to be trained, and will not be as productive as the lost employee. Temporaries are often more expensive than regular employees and are not as productive. This represents an indirect expense of long and short-term disability.

The best scenario is to get the employee back to work and productive as soon as possible, even if it means making reasonable accommodations to the work environment in order to achieve this. However, it is understood that from time to time, situations will occur that require disability payments. This is not expected to be a major concern, as these circumstances are infrequent.

Vacation, Personal Days, Holidays

As stated earlier, vacations and holidays help employees to maintain mental health. It also helps them to avoid burn out. Vacation and holiday pay is already calculated into the payroll budget. Careful planning will help to avoid unnecessary costs due to the need to cover the employee's job. Vacation and holiday pay are an area where longevity with the company can be covered with little impact on the company budget. Kokomo, Inc. will provide pay for the following holidays. The plant will be closed on these holidays with no production scheduled.

Recognized Company Holidays

President's Day

Good Friday

Memorial Day

Independence Day

Labor Day

Thanksgiving

Christmas

Vacation time will be accrued in accordance with the amount of time with the company. Employees will be allowed to take vacation, as approved by their manager in accordance with the following schedule.

Years with company Days Accrued 1-5 2-8-3-10 5-15 7-17-10 20-12+ 25

This schedule rewards those that have been with the company for the longest amount of time. It rewards those that have proven to be dedicated employees by time to live and enjoy their lives. It gives those that are just beginning something to work towards. Employees that have experience are valuable assets, therefore it is important to foster good mental health and happiness. Those that are most valuable through their time and effort are rewarded generously under this plan. It is felt that the productivity of the experienced employee offsets the time spent away from work on vacation.

In addition to vacation days, employees will be allowed paid personal days according to the following schedule. These days can be taken to cover unexpected illness or problems that may arise.

Years with company Days Accrued 1-2 2-3 3-5 5-6 7-7-10-10-12+ 10

This vacation pay and personal day schedule represents one of the greatest incentives to stay with Kokomo, Inc. It is one of the most generous vacation and sick day plans in the area. Many plans top out at 5 years, with no further increases. Once an employee tops out, they are more likely to leave to find greener pastures. This plan encourages longevity with the company by rewarding hard work and dedication.

Extra Performance/Attendance Bonuses

The CEO and President of the company may decide to use a portion of the unused payroll money for production bonuses. These bonuses would add an extra incentive for employees to do their best for the company when they are on the job. These bonuses will take into account attendance, productivity, quality of work, and years with the company. This is another area where the employees that have been with the company longest have the greatest incentive to stay. There is considerable flexibility in these bonuses and they will be awarded according to the budget, production and overall performance of the company. They will be evaluated on a yearly basis and approved by upper management.