05/18/19 HERE COME HEFTY HIKES IN BENEFITS

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HERE COME HEFTY HIKES IN BENEFITS

Benefits have always been the smaller segment of compensation costs. After all, wages constitute 72.5% of all labor bills, and their direct value to workers makes pay raises more visible than Social Security payments or sick leave. This year, however, the tail may wag the dog.
In the early 1990s, companies offset pay raises by holding down benefit increases. That's still going on, but the gap is closing. In the first quarter of 1998, for example, wages and salaries increased 4%, while benefits rose 2.3%. For the whole year, economists at Standard & Poor's DRI expect wage gains to stay at about 4%, while the growth in benefits accelerates by a full percentage point, to 3.3%. Since labor costs account for about two-thirds of total business expenses, the resulting 3.6% increase in compensation will crimp profit margins. Rising labor costs are a key reason why DRI forecasts aftertax profits will grow just 3.3% for this year.
What's behind the jump in benefits? First of all, the costs of many benefits, such as paid vacations and holidays and pension liabilities, follow in lockstep with any pay increases. Second, past savings in health-care outlays were achieved mostly by shifting employees into health-maintenance organizations. But by 1997, 85% of employees were enrolled in such plans, according to the latest Mercer/Foster Higgins study. That's a big leap from 77% in 1996, suggesting that the era of medical-cost savings is ending.
Indeed, the Labor Dept. said that health-care insurance premiums increased 2.2% from the fourth quarter to the first, compared with almost no gain a year earlier. The Mercer survey found that businesses are bracing for a 7% increase in their medical costs for all of 1998. With some HMOs running into financial troubles, a few are hinting at double-digit increases for 1999.
Still, not all benefits are heading north. Companies are getting some relief from an unlikely source: state governments. In the first quarter, the drop in payments for workers' compensation and unemployment insurance funds largely offset increases in the costs of other benefits. The trend began in the mid-1990s, when some states, mainly in the South, cut their business-tax rates as a way to attract industry. Now, even tax-heavy states are getting into the act. In February, Massachusetts cut its workers' comp premiums by 21.1%, in a move that could save businesses a rollicking $200 million this year.
A cost reduction is always welcome. But this year, a government discount could just turn out to be a gift from the gods. Businesses in 1998 will surely face heated competition for skilled workers. And that means higher compensation costs. Companies might find themselves growling about the extra expense, but with the tightest labor markets in over a generation, executives may have little choice but to fork it over.
By Kathleen Madigan in New York

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