Direct Compensation and Fringe Benefits Fringe Benefits

Direct Compensation and Fringe Benefits

Fringe benefits refer to those elements of the total compensation package which are apart from the monetary payment made to an employee by the employer (Schuler and Jackson, 1996). These can include "employer's contribution to social security, workers compensation, unemployment compensation, health, life and dental insurance, private pension plans and cafeteria style benefits plan. " (Brookshire and Smith, 2008 p. 69)

Unionized organizations have often been faced with the problem of choosing between fringe benefits and direct compensation. But over the years, this trend has also been witnessed in non-unionized organizations where employees demand more monetary compensation as opposed to fringe benefits believing that the latter do not matter as much as the former. This has had companies in a quandary: should they let go of fringe benefits when some employees do not seem to value them?

The answer is an emphatic" No" in my view. This is because contributions made by the employers towards things like social security and insurance tend to be far more critical than money when it comes to an emergency. A family member gets sick and needs to be taken to the hospital. At this critical hour, what will be immensely important is not how much money a person has and what he can pay but how good his insurance plan is. Normally employers provided medical insurance would far exceed the coverage than an individually purchased plan and hence these contributions are vital and cannot be replaced with direct compensation.

In any organization, the compensation plan is of great significance. Employees are more attracted to a firm that has a comprehensive compensation plan which includes both fringe as well as monetary benefits. There are various types of reward plans in place too which tend to act as a great incentive when employees are being asked to meet company targets. Without an attractive compensation and reward plan, it is not possible to attract or retain talented employees. We must understand that a firm that pays huge monetary bonuses with no fringe benefits is likely to attract a very different class of employees. These employees will over a period of time demonstrate a low credit ratings because they failed to pay huge medical bills and will usually appear more tired and unmotivated because they had to pay for their own vacations and hence never took any. The employees may fail to see that the company has actually been paying them for medical and travel but since it is offered as a monetary plan, it was never utilized as such.

Even though people may sometimes want to see more cash than indirect benefits, it must be noted that literature and research reveal that it is the package as a total of both direct and indirect benefits that tend to help a company differentiate itself from others. It has also been noted that it is this complete package which adds to the attractiveness of a company. It also has several other positive effects as Berger and Berger (2000) note:

"There is an overwhelming consensus among academics and consultants who have studied the impact of work-life benefits that these initiatives have a substantial positive impact on the organization. This is in addition to the value as the differentiator in the total pay package. It turns out that work-life benefits are also good for the bottom line. The areas in which they have the most positive impact include: recruiting, retention, productivity, morale, motivation, satisfaction, loyalty, commitment, absenteeism, stress reduction openness to change." (p. 590-591)

This clearly shows why fringe benefits are important and why they must not be replaced by monetary compensation. Secondly we need to understand that the work life balance created by fringe benefits is enormously important to the overall well-being of the employee as well as the organization. When a person has money, there are a number of things he CAN do but may NEVER end up doing. For example he knows he can spend this money on a luxury vacation but the plan may never materialize. He can buy good insurance coverage but may keep delaying it thinking who needs to see a doctor every day. But when the same person is being offered benefits for some precise function, he will have no choice but to avail them like have a good medical plan, make contributions to social security regularly and take a good vacation. This will improve and enhance the quality of his life and also give him a greater sense of peace and balance.

The family life improves as well. Children are well taken care of because of the medical insurance plan that covers children as well. Spouse feels more relaxed since the family can take a vacation and be close to each other. These all add to the quality of life an employee enjoys with fringe benefits and it can lead to some very positive effects on the overall organizational performance and productivity. For this reason, we say that fringe benefits must always be a part of the total compensation package and should not be replaced by money or direct compensation.