A Varied Menu of Benefits

By John Greenwald

Companies are offering employees "cafeteria-style" choices

As the summer vacation season arrives, employees at Fluor Corp. (1982 revenues: $7.3 billion) face a tough decision. Do they want more money or more time off? Those working for the California-based construction firm can add unused holidays and sick leave to their vacations and take extra, paid time off. On the other hand, they can sell their vacations back to the company for cash and spend their summers on the shop floor or behind their desks.

Such choices are part of a growing corporate trend toward flexible, or "cafeteria-style," benefits. Instead of dispensing rigidly fixed programs to everyone on the payroll, some 100 major U.S. firms now offer or plan to offer expanded menus of alternatives. Employees whose working husbands or wives already have family medical insurance, for example, might prefer legal insurance or added vacation instead of more health coverage.

The options can be as varied and innovative as personnel departments can make them. At Detroit's Comerica Inc. (1982 assets: $7.4 billion), Michigan's second largest bank holding company, employees can tailor their benefit packages to help pay for child care. At Baker Packers, a unit of California-based Baker International (1982 revenues: $2.5 billion), workers can cash in up to a week of vacation and deposit the proceeds in company-sponsored savings plans that invest in stocks and other securities.

A main appeal of the flexible programs is tax savings. Employees who opt for child care or other services may receive them in place of higher salaries. But since the benefits are not considered taxable income, the workers are not pushed into a higher tax bracket.

Another driving force behind the new policy has been the mushrooming cost of traditional benefit plans, especially for health programs. U.S. companies paid an average of $6,627 per employee for benefits in 1981, according to a study released last year by the U.S. Chamber of Commerce. Those payments equaled 37% of the typical worker's salary, up from about 30% a decade ago. Wyatt Co., a consulting firm based in Washington, notes that health-care expenses have climbed at an annual rate of 18% over the past five years. Says Lance Tane, a Wyatt analyst: "Benefits used to be considered the condiments of any pay package, but suddenly they were becoming part of the meat and potatoes."

The flexible fringes save firms money mainly by shifting corporate outlays away from medical plans with rapidly rising costs. Executives at SCM Corp. (1982 sales: $1.9 billion), a New York City-based conglomerate, expect that the cafeteria-style program launched this year will save the firm $600,000 in 1983 and $1.2 million each year after that. The new package requires employees to pick up part of their health insurance premiums, which the company had previously absorbed, but increases the benefits available under SCM's employee savings plans.

The new programs, in part, reflect the changing U.S. work force. Traditional benefit plans have been mainly geared to single-income homes in which husbands work and wives tend to the children; But a survey of Comerica's 5,200 employees, for example, showed that only about 13% were living in such once typical households. The 1980 census reported that 51.3% of U.S. women over the age of 16 had joined the labor force, compared with 37.7% in 1960. The number of families supported by one breadwinner, meanwhile, dropped to 33% from 48.3% over the same period. Says Philip M. Alden Jr., a benefits specialist with the New York City consulting firm of Towers, Perrin, Forster & Crosby: "Benefits had to change with the times."

Workers, so far, seem pleased with the cafeteria-style plans. Says Gene Cincotta, director of compensation and benefits for electronics and defense operations of TRW (1982 sales: $5.1 billion): "The programs show that the company trusts its employees to make their own decisions, and that becomes part of the working climate." Last year a poll of the unit's employees found that some 96% of them said they were "moderately or very satisfied" with the firm's flexible benefits. The TRW program included extra life insurance at favorable rates and a wide range of medical and dental choices. Says Carol Schamp, a department manager: "It's a very good plan. I've found no problems selecting just the kind of benefits that I need."

Companies report, though, that cafeteria programs can be expensive and time consuming to introduce, and some firms are hanging back because the startup costs are too high. SCM spent $100,000 simply for an information campaign to explain its new plan to employees. Companies must also make substantial investments in computer software in order to administer the complex benefits programs. Even then, keeping track of who gets what can create headaches.

Another company concern is that the IRS will decide to tax the employee benefits in the flexible plans. The IRS has not yet issued a permanent ruling on the practice of exempting most of the funds from taxes, and some firms fear that it may eventually decide to crack down on the procedure. The federal agency, which has been preparing regulations covering the plans, hopes to issue them later this year.

Many firms, however, seem willing to push forward with flexible programs no matter what the IRS decides. Says Martha McDonald, personnel services manager of the Public Service Co. of New Mexico in Albuquerque, which has been considering switching to a cafeteria plan: "We feel we could implement one based on current proposed regulations and then change the program if we needed to." McDonald adds that she personally would like such a package. "I never get around to taking my vacation," she says, "so I would certainly rather be paid for the vacation I don't take."

--By John Greenwald.

Reported by Russell Leavitt/Los Angeles and Adam Zagorin/New York

With reporting by Russell Leavitt, Adam Zagorin This file is automatically generated by a robot program, so viewer discretion is required.