Page 230 - Introduction to Business

204 PART 2 Managing Business Behavior

employers offer employees a myriad of other benefits including vacation time, paid
sick leave, child-care, pension or retirement plans, and even stock ownership or
options plans. In recent years, some have argued that third-party insurance pay-
ment of employee medical care has helped lead to a surge in health care costs, and
many companies like Wal-Mart are asking employees to directly pay at least a por-
tion of health insurance costs.

Pension, or Retirement, Plans. Recent scandals at Enron Corporation and
other companies have brought considerable attention to the existence and viability
8
of company pension benefits and plans. There are basically two kinds of pension
defined benefit plans Retirement plans plans: defined benefit plans and defined contribution plans.
where the benefit is based on a formula Defined benefit plans are generally fully funded by the employer and regulated
and precisely known
by the federal government pursuant to the Employee Retirement Income Security
defined contribution plans Retirement Act (ERISA). The federal government, up to certain limits, insures these pension
plans where contributions are known
but benefits may vary benefits even if the employee’s company goes bankrupt, with the federal Pension
Employee Retirement Income Security Benefit Guaranty Corporation (PBGC) administering this insurance program in
Act (ERISA) A federal law passed in which employers pay insurance premiums to the PBGC. Employees receive defined
1974 to regulate employer-defined benefit pensions based on the number of years they work at the employer and the
benefit plans
wages or salaries they have received during that employment. A fairly common for-
Pension Benefit Guaranty Corporation
(PBGC) The federal agency mula is that employees receive defined pension benefits of 2 percent per year mul-
administering the defined benefit plan tiplied by the employee’s years of service multiplied by the average of the
insurance program employee’s last three years of wages or salaries. For example, if an employee worked
for a company for 30 years, he or she would receive a defined annual pension for
the rest of his or her life of 60 percent (2 percent times 30 years) of the average of his
or her last three years’ wages or salaries. If the last three years of the employee’s
wages or salaries averaged $50,000, the employee would receive an annual lifetime
pension of $30,000. The employee bears no investment or other risk with respect to
this pension. Under ERISA, all employees working for an employer with a defined
benefit pension plan are generally vested in that pension plan after five to seven
years on the job. Employees leaving that employer before vesting receive no retire-
ment benefits.
Today, however, employees are probably more likely to work for an employer
with a defined contribution pension plan, than for one with a defined benefit pen-
sion plan. Under defined contribution plans, a defined contribution is made into
the pension plan, usually each pay period, by the employer or by the employer and
employee jointly. For example, a plan may mandate that the employer contribute 8
percent of the employee’s salary and the employee contribute 6 percent of her or his
salary to the plan each monthly paycheck. Thus, if an employee makes $5,000 per
month, $700 per paycheck ($400 from the employer and $300 from the employee)
goes into the plan. The employee generally has a choice of a number of investment
options for the monies (e.g., stock investments, bond investments, money market
funds, etc.) and absorbs considerable risk if the investment choices turn out to be
poor ones. Some companies have historically required, as Enron did, that all or a
portion of the money the company contributes to the plan must be invested in the
company’s stock. In such situations, the investment returns of the pension plan will
turn in good measure on how well the company and its stock perform.

reality If you have a choice on a job, would you rather have a defined benefit
CH ECK or a defined contribution pension plan?

Stock or Stock Options. A growing number of companies give employees
stock options The right to buy company
stock at a predetermined price company stock or stock options as a benefit. Stock and stock options grants are

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