A Delicate Balance

One of the toughest jobs for CFOs is building a quality benefits package that won't collapse under its own weight.

Over the years, U.S. corporations have built up the package of benefits they offer their employees. The added compensation represented by health care, retirement plans, and other perks has grown impressively.

Today, however, those packages are in danger of falling apart. Soaring health-care costs, aging workers, and a slack economy have made providing decent medical coverage and adequate pensions — without gutting profits or paychecks — a difficult balancing act. And increasingly, that task has fallen to the CFO.

By any reckoning, the price of employee benefits has gotten out of hand. According to the U.S. Bureau of Labor Statistics, health-care and retirement benefits now make up about a third of the total cost of employee compensation. That percentage is almost certain to go higher, too. In 2004, the cost of worker benefits surged 6.9 percent, more than twice the increase in wages and salaries.

Outside of vendors, this painful increase in the cost of benefits hurts almost everyone. While employers top that list, employees are not far behind. Elise Gould, a labor economist at the Economic Policy Institute, in Washington, D.C., says the escalating cost of benefits could have a dampening effect on hiring, as managers look to get more hours out of current staffers rather than add more workers.

“Hiring is not happening at a pace you would expect in a recovery,” notes Gould. Neither are raises. Wages and salaries grew by just 2.4 percent last year — a puny increase that can be attributed in part to burdensome benefit costs.

Then there is the impact on competitiveness. On average, American corporations pay 5.5 percentage points more for benefits than companies operating in the nine countries that do the most business with the United States. Not surprisingly, this added cost plumps up SG&A, which in turn, eats away at profit margins. At General Motors Corp., for example, the price of providing health-care coverage works out to about $1,400 per automobile built. That’s more than what GM spends on steel for each car.

The upshot? Consulting firm McKinsey & Co. estimates that without cuts in expenditures — and lacking a dramatic pickup in the economy — the average Fortune 500 company will soon spend as much on health care as it makes in profits. If the trend in health care continues, many companies will begin axing other benefits, including education and 401(k) matches. “Probably the only benefit that is relatively safe,” says SAP America CFO Mark White, “is vacation days.”

The $5,000 Deductible

That’s not great news for employees. Neither is the corporate strategy for dealing with runaway health-care premiums, which have shot up nearly 60 percent over the past four years. In a move that harkens back to the switch to defined-contribution pension plans in the late 1980s, many businesses have begun to off-load risk. In the case of medical insurance, that means asking employees to pay a larger share of their health-care costs. The plan, while understandable, doesn’t necessarily solve the underlying problem — sky-high medical charges. And it has some serious drawbacks. In an exclusive survey (see “Uncertain Benefits: The 2005 CFO Human-Capital Survey“), we asked finance chiefs if they could continue to shunt medical-care costs to employees without harming workforce morale. No surprise here: 55 percent said they could not.

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