Look no further for proof of capitalist ingenuity than employment benefits and perks. Why such corporate creativity, and how does it impact family law?
Defining Benefits and Perks
Employee “benefits” are a form of indirect, nonwage compensation that, if not offered by the employer, would have to be funded by employees themselves. Some benefits are required by law (e.g., employer contributions to Social Security), but most are discretionary. Pensions and healthcare plans are examples of benefits. Corporate “perquisites” are offerings designed to convince an employee to value one employer over another. Flexible work hours and free delivery of dry cleaning are examples of perks. Some nonwage compensation straddles both definitions.
Compiling a comprehensive list of nonwage compensation would be a humorous but useless exercise. Examples include group insurance (health, dental, disability, life, long-term care); retirement benefits (defined contribution plans, defined benefit plans), cash bonus plans, stock options, restricted stock, and other equity plans; convertible debt; carried interest; profit sharing; deferred salary plans; housing; relocation assistance; expat packages; tax preparation; transportation (company car, corporate jet); tuition assistance; wellness programs; flexible spending accounts; vacations (including the startling emergence of “unlimited vacations”); adoption assistance; maternal/parental leave; sick leave; child care; work-from-home options; flexible hours; casual dress codes; free food; concierge services (dog walking); lifestyle coaching; product discounts; gym memberships; fitness classes; yoga; team bonding retreats; sleeping pods; and intraoffice ping-pong.
Integrating Benefits and Perks into Compensation Packages
People are employers’ most valuable assets, and also their greatest expenses. Employers combine cash wages and noncash compensation to attract and retain good people. The question that drives the types of benefits and perks family lawyers see is: What combination of cash and noncash compensation gives an employer the biggest bang for the buck?
The answer to this question varies by industry and level of employee compensation. Examining the growth patterns for nonwage compensation over the past decade, some researchers have determined that changing tax regimes, rising healthcare costs, and fluctuating market forces in the U.S. economy do not explain the rise of benefits and perks. (Facts, percentages, and numbers referenced in this article were derived mostly from studies performed by Glassdoor and cited in articles appearing in the Harvard Business Review and other publications.) Unquestionably such factors impact specific kinds of nonwage offerings (see, for example, the 2017 amendments to I.R.C § 162(m) that eliminate corporate deductions for some executives earning over $1 million), but larger forces are at work.
The “diminishing marginal utility of income” partly explains the shift from wages to benefits and perks. Above a certain income level, workers start to care more about benefits and less about salary. The marginal utility of an extra dollar in cash falls as income rises, and eventually benefits become more attractive than cash. Some benefits such as equity plans provide the opportunity for tremendous wealth beyond what an employer could pay in cash, while others improve an employee’s present quality of life. Most of the growth in benefits has occurred in high-skilled occupations (tech jobs, finance, and other white-collar sectors) or fields with large numbers of union workers (construction and skilled trades).
By contrast, industries that rely more heavily on low-skilled jobs (retail, wholesale, accommodation, and food services) have not shifted from wages to benefits. Workers who earn less care most about earning cash to pay for basic living expenses.
Explaining Why Employers Prefer Benefits to Wages
Employers design many benefits to align their employees’ interests with their own so that strong performance enriches both. Equity compensation (options, restricted stock units (RSUs), etc.) and performance-based bonuses (cash bonuses based on individual or employer achievement) are two excellent examples of this.
Another advantage of forfeitable benefit compensation is that it acts like “golden handcuffs” to retain highly compensated individuals. Golden handcuffs mostly consist of unvested stock options, nonqualified pension plans that will be forfeited upon departure, forgivable loans, or prepaid bonuses that must be repaid.
Discretionary compensation, such as annual cash bonuses based on subjective considerations, provide employers with greater flexibility than traditional wages. An employer can slash a bonus, perhaps so substantially that an employee will leave voluntarily rather than be fired. Likewise, discretionary perks can be curtailed if the need arises.
Employers also prefer paying employees with benefits and perks, rather than cash, because cash is a precious business commodity. Paying employees with the promise of future benefits from unfunded and nonqualified pensions, for example, can help boost the employer’s current financials. This is particularly important for public companies and those seeking investors.
Identifying Employee Demand for Benefits and Perks
A recent study indicates that eighty percent of workers would prefer new or additional benefits or perks over a pay increase, including ninety percent of millennials (respondents presumably were in a high-income industry). One reason is that many benefits and perks are nontaxable to the employee while usually deductible by the employer. Another is that they provide a sense of security for an employee with a family.
Studies show that the most preferred benefit for employees is healthcare insurance (40%), followed by vacation/paid time off (37%), performance bonuses (35%), paid sick days (32%), and 401(k)/retirement/pension plans (31%). The quality of health/dental/vision insurance typically is the most significant employee benefit consideration at the time an individual considers a job offer, with fifty-four percent giving it “heavy consideration” and thirty-four percent “some consideration” when choosing between two offers. Most of these benefits are quantifiable in monetary terms.
Trickier for the family practitioner are the three most popular perks, which are difficult or impossible to value and have important implications for both parenting and financial issues. Job seekers typically give “heavy” or “some” consideration to flexible hours (88%), more vacation time (80%), and work-from-home options (80%). Women are more likely than men to give each of these perks “heavy consideration.” (More flexible hours: 47%/38%; more vacation time: 40%/32%; work-from-home: 55%/40%). A rational person may accept a job with lower wages but more flexibility, complicating earning capacity analysis and financial orders.
Incorporating Perks into Parenting Plans
Flexible working hours and work-at-home options can be a key consideration when determining physical custody and parenting plans. The less tied an employed parent is to a traditional nine-to-five work schedule, the more creative the parents and the professionals can be in crafting parenting plans.
Addressing Benefits and Perks in Financial Orders
The value of straightforward benefits is easy to quantify. Simply determine the amount that an employee would have paid out-of-pocket for the benefit had the employer not provided it. This amount often can be treated as income for child and spousal support purposes.
Practitioners often employ experts to determine a present value of sophisticated benefits, such as pensions, stock options, restricted stock, and carried interest. Depending on the jurisdiction, plan descriptions, and other instruments pertaining to a benefit, as well as the timing of grants and vesting, can be extremely important for determining if a benefit is divisible property, future income, neither, or possibly both. Parties in high-net-worth cases benefit from settlements that carefully address complex benefits, whether they are included as property or future income. (Beware the double dip!)
Perks can be extremely difficult to value and apportion. How much are flexible hours or work-at-home options worth to a specific individual? Is a casual dress code worth anything, or free coffee if an employee only drinks tea?
A deeply sticky issue is whether and how to calculate earning capacity when an employee receives a variety of benefits and perks, as opposed to cash. Some employees reject jobs with higher pay and instead accept positions with lower wages supplemented by perks and benefits that are difficult to value. With increasing demand for nonwage compensation, this dilemma has become the norm, rather than an exception.
All the President’s Men introduced sage advice: “Follow the money.” Those were simpler days. Today, cash is the tip of an amorphous compensation iceberg.