Increasingly, employees are being allowed to choose benefit packages from a menu
ID: 1190118 • Letter: I
Question
Increasingly, employees are being allowed to choose benefit packages from a menu of items. For instance, workers may be given a package of benefits that includes basic and optional items. Basics might include modest medical coverage, life insurance equal to a year’s salary, vacation time based on length of service, and some retirement pay. But then employees can use credits to choose among such additional benefits as full medical coverage, dental and eye care, more vacation time, additional disability income, and higher company payments to the retirement fund. How do you think flexible benefit packages would affect an employee’s choice between higher wages and more benefits?
Explanation / Answer
An employee will need to trade off between wages and benefits. In such a case, he should decide based on opportunity cost of wages (or benefits) in terms of benefits (or wages).
If the opportunity cost of wages is lower than an acceptable rate pre-set by the employee, he would prefer more benefits, and if the opportunity cost of wages is higher than the acceptable standard, he would prefer higher wages. A fixed compensation structure does not allow this flexibility of economic choice, since in that case the employee is required to accept whatever bundle of financial and non-financial benefits the company offers to him.