Total Compensation: Direct Pay and Benefits Trade-Off

Monday, December 06, 2010

Organizations have limited budgets and linked ability to trade-off direct cash compensation and benefits without severely impairing their competitive position for human capital. It is correct to assume that employees will weigh the mix of cash compensation and benefits based on their immediate and long-term needs when making employment choices. One such choice involves the cost of health care.

As health care costs have continued to increase, many organizations do not have the ability to increase both their contributions towards health care and direct cash compensation in the form of salary increases. Consequently, organizational salary budgets have remained in the 2% to 5% range for the last decade. According to WorldatWork, which has published an annual salary budget survey for several decades, the actual median merit budget salary increases from 2000 to 2010 have ranged from 2.0% to 4.8% with little variation between job classifications.

Thus for a dollar of salary in 1999, the average U.S. worker saw an increase in base salaries of approximately 160% through 2010. On the other hand, according to the National Conference of State Legislatures during that same period, annual employee health care contributions rose from an average of $1,619 to $3,997 or 159%. According to the same report, annual employer contributions have risen from $4,819 to $9,773 or 130%. While employee health care contribution costs have risen significantly faster than the employer’s, the median increase over the 10 year period differed by 1% and both groups have seen a doubling of expenses in the last decade.

While other economic factors were at play during the decade of 2000-2010, the average U.S. worker has seen erosion in real income as health care costs have eaten into earnings. During 2007 testimony to the House Committee on Financial Services, by Federal Reserve Chairman Ben Bernanke, discussions centered on economic growth for the period from 2000 to 2007, which saw significant growth in U.S. productivity, that growth did not translate into real wages for most workers.

Although there is no definitive proof linking the decline in annual salary increases and the continued increase in health care costs, it is reason to surmise that seeing the rise in health care; organizations have consciously or unconsciously opted to redirect monies from direct cash to benefits.