Employee Benefits and Compensations in the USA and Canada - Essay Example

Comparison of Employee Benefits and Compensations in U.S. and Canada Introduction Although compensation and benefit programs in Canada and the U.S. are similar in many respects, there are key differences reflecting economic, cultural, political, and legal and tax considerations. Some advance thinking on the part of management of companies that have employees in both countries can spare the companies and their employees some unforeseen problems, both in the short and long term, and at the same time treat employees on both sides of the border equitably. Businesses that establish operations outside their home country usually confront a central question: Should the company extend its programs to include the new operations in the foreign country? Or should it allow for differences between the two? Although management may wish to mirror what is currently provided to employees of the parent company, variations in culture, tax law, employment standards and benefit regulations often make a "cookie cutter" approach not feasible. One key disadvantage is that the company may end up with a compensation and benefits system that is totally out of line with local competitive practice. For example, establishing a medical plan in the U.S. based on the customary Canadian norm of a C$25 deductible, where Americans expect a US$100 deductible or more would be very generous and go against the U.S. trend of increasing cost-containment mechanisms. Certain legal barriers exist that make it difficult or impractical to have employees on the foreign payroll included in a pension or profit sharing plan established under the laws of the home jurisdiction, and competing for labor with companies in other countries also requires an adjustment to local compensation and benefit practices. For these reasons, Canadian companies with employees in the U.S. usually decide to institute compensation and benefit plans designed specifically to meet local laws and customs. Consider Culture Social and cultural attitudes have a large influence on compensation and benefit practices in the U.S. and Canada. Because of the different historical development of the two countries and the stronger European influence in Canada, the contrast in cultural environments has been likened to a Canadian "mosaic" versus an American "melting pot" - that is, diversity versus assimilation. Survey findings show that Canadian and U.S. workers have some very different workplace attitudes concerning management-employee relations. These differences are expected to soften among employees of companies with operations on both sides of the border, as recognition of the cultural differences gradually leads to adjustments that promote competitiveness. A business person should be aware that Americans tend to be more individualistic and less security conscious than Canadians. Canadians historically have supported more public benefits, while Americans fear public benefits will lead to "socialism." Whereas American businesses take pride in being "lean and mean," Canadians are known for placing a greater emphasis on the "people" aspects of business. From the role of government to the structure of the compensation programs, there are many similarities - and many differences (McNamara, 81). Legislative differences start with a comparison of Canadas universal health coverage to the U.S. system of private benefit programs. What the U.S. federal government does not do for benefits directly, it does indirectly by granting a wide range of tax incentives to encourage programs. The steady flow of changes in benefit laws and a restrictive regulatory climate have created a high level of frustration in the U.S. governmental and regulatory complexities that far exceed those experienced in Canada, where "nondiscrimination" rules do not exist to any large extent. Contrary to Canada, where provinces generally regulate conditions of employment and benefits, the U.S. state governments have fewer jurisdictions over employee benefits and compensation than the U.S. federal government. States can regulate the insurance products sold within their borders including group benefits offered by employers. Employers who self-insure, however, have been exempt from this state regulation. Employers who do not self-insure, and who maintain business operations in more than one state, may need to tailor their coverage in each to conform to the approximately 700 state laws nationwide. Although some states are becoming more active in mandating labor laws that do not apply at the federal level, the role of provincial employee benefits and compensation legislation is more significant in Canada than the role of state legislation in the United States. Competitiveness Dominates Competitive practices are important considerations in both countries and competition in the U.S. is still the dominant factor for cash compensation and retirement income. Recently, however, rising health care costs have been the fastest growing component of benefit expenses in the U.S., somewhat overshadowing the traditional concerns about competitive practice. In Canada, employers are not facing the same explosive cost-containment problems because health care costs are mainly financed outside of the employment relationship. At the blue collar level, U.S. labor unions typically have had a major influence in employee benefit coverage and in negotiating wage levels. The blue collar unions are increasingly attempting to negotiate benefits that are widely available to salaried employees. Recently, with the growth of the service and other less-unionized sectors, the influence of labor has declined in the U.S. According to U.S. government statistics, only 16.8% of all wage and salary workers were represented by a union, down from 20%. Unions in Canada are strong and represent about double the percentage of the working population belonging to unions in the U.S. The proportion of labor representation in Canada has not declined as much as in the U.S. The Philosophy of Benefits In addition to dealing with union pressures, employers in both countries are learning to formulate clearly articulated compensation philosophies that can be extended to employees of a subsidiary in another country. For instance, uniform salary administration may be desirable, but differences in law and administrative practice should be considered in advance of any decisions. One common mistake is for companies to send people across the border assuming that the parent corporation will be able to provide exactly the same benefits and compensation to foreign employees as it does at home (Carson, 68). Companies should be prepared to adjust basic corporate philosophies in accordance with differences in countries. Taxation will be another key area of concern to Canadian and U.S. business people. Employers will find that levels of taxation vary significantly between Canada and the U.S. Personal income levels are much lower in the United States. The U.S. has two official tax brackets, 15% and 28%. There are also state income taxes in at least 40 states, usually less than 10% of net taxable income. This compares to Canadas three federal income tax brackets, federal surcharges, significant provincial personal income tax and often additional provincial surcharges. While the Canadian effective tax rates on capital gains and dividends are lower, the U.S. income tax system provides no preferential treatment for dividend income. Canadian taxpayers receive a dividend tax credit on Canadian securities, but Americans can deduct home mortgage interest on principal and secondary residences, a deduction not available in Canada. Social security payroll taxes are considerably higher in the U.S. To illustrate the relative tax payments, we compared two married couples, each with two children, one residing in Ontario and the other in New York State. The New York couple pays nearly 10% of gross income less in combined federal and state taxes, and about 5% of gross income more in social security payroll tax, for a net tax difference of 5% less than the Ontario couple. Significant differences also apply to the tax treatment of various kinds of employee benefits and deferred compensation. The U.S. allows employers to finance a higher level of group life insurance without appearing as taxable income for employees (up to US$50,000 vs. C$25,000). The U.S. also allows higher levels of tax-favored funding of defined benefit pension plans. And, Individual Retirement Accounts in the United States are considerably less attractive from a tax standpoint than the Registered Retirement Savings Plans in Canada. The Total Compensation Pie In looking at the relative salary levels of positions in the U.S. and Canada, several observations can be made. Senior U.S. executives are paid much more than their Canadian counterparts and a far greater proportion of the total direct compensation of U.S. executives comes from bonuses. The total range of pay between the senior and a lower level position is much wider in the U.S. than in Canada. Our surveys of salary increases show lower percentage increases being given in the United States as well. Canadian executives received an average salary increase of 6.3% versus 5.8% in the U.S. Companies in both countries have grown away from using traditional merit and salary increases as the only means of rewarding performance. The trend for Canada appears to be moving in the direction of the U.S. by awarding a greater proportion of variable pay. In the U.S., executives often receive bonuses in the range of 30-35%, with typically CEO bonuses averaging 60% or more in some cases. Canadian executive bonuses fall in the range of 20-25%, with CEOs receiving bonuses of 40%. In comparison with Canada, U.S. bonus plans extend further down the organization (Torrence, 11). In the U.S. there has been a trend toward restructuring executive total compensation to include a larger portion of long-term incentives such as stock options and other long-term vehicles. In the U.S., a recent survey shows that 96% of companies have an annual bonus plan, and 92% have one or more long-term incentives. One of the main reasons for this is to align incentives for individual executives with performance that enhances shareholder value. Usage of long-term incentives in Canada is developing at a relatively slower pace. The single most prevalent long-term plan in both countries is the stock option plan. Executive perquisites are generally more prevalent in Canada than in the United States (Babcock, 1198). Also to be kept in mind are compensation differences relating to disclosure, terminating employees and in change-in-control arrangements. The federal U.S. Securities and Exchange Commission requires top executives to disclose their total cash and non-cash compensation. Canadian corporations are not subject to such a requirement for individual executives unless their stock is listed on a U.S. stock exchange. Comparing Benefits: Who Gets What The Canadian and U.S. social security systems have been designed to be a floor of protection, replacing approximately 40% of income for the worker retiring with average earnings. These benefits have traditionally been supplemented by employer-sponsored pensions, by individual savings and to a growing degree, by part-time employment of the retiree (John, Press). The U.S. social security program, providing retirement, survivors and disability benefits, is financed primarily by payroll taxes shared equally by employers and employees (Swenson, 12). Employer contributions are deductible business expenses. Employee contributions are not tax deductible, and depending on total income, up to half of the social security benefit is subject to income tax upon receipt. Health benefits for older individuals and the long-term disabled in the U.S. are provided through the federal Medicare program. Except for those earning very low incomes who qualify for assistance under the federal/state Medicaid program, persons in the U.S. under age 65 have no federal or state health coverage. Pension Points of Interest Significant differences exist in pension benefits, pension contributions, taxation, pension investments and supplemental retirement arrangements between the two countries. Pension plan vesting is much quicker in many provinces, two years instead of the five-year vesting that took effect in the U.S. in 1989. Differences in tax treatment have resulted in relatively more Canadian than U.S. retirement plans that permit or require employee contributions. The tax-favored treatment of 401(k) plans in the U.S. has resulted in a greater prevalence of matched savings/thrift plans - 81% of major U.S. employers versus 44% of major Canadian employers (Pauly, 50). An overview of differences between typical U.S. and Canadian employee benefit packages, of major concern to U.S. employers is the rising cost of health care. Employer-sponsored medical plans in Canada are supplementary to a government primary plan, while in the U.S. the employer plan is often the only source of health coverage. Medical benefits are the fastest growing employee benefit cost for U.S. employers, with cost management in plan design much more prominent in U.S. plans than in Canadian plans. One other interesting cultural difference is reflected in the longer periods of paid time off in Canada. Average work weeks tend to be shorter in Canada, and periods of paid time off longer for Canadians (Toronto Star, 7). Flexible compensation is an alternative delivery mechanism for compensation and benefits that has proven extremely popular in the United States, while recently starting to catch on in Canada. U.S. employers have offered "choice-making" for many years. Flexible benefits have been a growing trend in the U.S. because they allow employers to manage benefit costs, particularly health care expenditures (Murray, 7). Canadian experience with flexible compensation is in the early stages, yet is clearly positioned as a major answer to the question of how to maintain benefits during a period of cost squeeze, as well as satisfying the changing employee demographics. It may be extremely difficult to confirm the provisions of a single employee benefit plan to include employees on the payroll in both countries and still comply with pertinent laws that apply in Canada and the U.S. without investigating the complexities involved. The Free Trade Agreement opens major new business opportunities - and challenges. Managing employee benefit and compensation practices in a well-designed and cost-effective way can only enhance the prospect of succeeding in this new competitive environment. Works Cited Babcock Jr., Bruce; Beck, Jeffrey F.; Bethard, William S.; Hall, Richard V.; Huerta, John E.; Patrick, Clayton C.; Schwab, Douglas M. (1997). Workmens Compensation Benefits. California Law Review, Oct, Vol. 55 Issue 4, p1198 Carson, James M. (1999). Employee Benefit Programs: A Total Compensation Perspective (Book). Vol. 5 Issue 1, p68-69 John Gallagher. Michigan CEOs Reap Benefits as Executive Compensation Resumes Its Swell. Detroit Free Press McNamara, Michael J. (2006). Workers Compensation Benefits: Adequacy, Equity & Efficiency. Vol. 2 Issue 2, p81-82 Murray, Micheal L.. (2005). Workers Compensation-- A Benefit Out of Time. Vol. 1 Issue 2, p8-15 Pauly, Mark V.; Rosenbloom, Jerry. (1996). Using a Total Compensation Approach for Wage and Benefits Planning. Benefits Quarterly, Second Quarter, Vol. 12 Issue 2, p47-55, 9p Steve E. Swenson, (1997). California Workers Compensation Reforms Cut Costs, Raise Benefits The Bakersfield Californian. Bakersfield Californian, The (CA), p11-13. Toronto Star, (2007). Improvements in compensation benefits planned. Canada, p5-7 Torrence, William D.; Rejda, George E. (1997). Short-Time Compensation as a New Employee Benefit. Vol. 3 Issue 3, p7-16 Read More