Employee benefit programs in the United States date back to colonial times and the Plymouth Colony settlers’ military retirement program in 1636, according to the Employee Benefit Research Institute (EBRI) in Washington, DC. Other landmark programs noted by EBRI include Gallatin Glasswork’s profit sharing plan in 1797; Montgomery Ward’s group health, life and accident insurance program in 1910; and Baylor University Hospital’s formalized prepaid group hospitalization plan in 1929.

Today, benefits are an integral part of an employee’s total compensation. In fact, the US Department of Labor’s Bureau of Labor Statistics estimates than an employer’s cost for providing benefits to employees is nearly 30 percent of each employee’s salary.

As employers seek to fill positions in an increasingly competitive job market, they continue to enhance benefits packages to attract employees. According to the US Department of Labor’s Bureau of Labor Statistics, private industry’s wages and salaries rose 3.5 percent in 1999 after increasing 3.9 percent in 1998, while benefits costs increased 3.4 percent in 1999, compared with 2.4 percent in 1998.

Because benefits programs vary widely, planners can play a key role in helping their clients maximize the value of their benefits plan. Says Jane King, CFP, of Fairfield Financial Advisors in Wellesley, Massachusetts: "People are becoming more aware of the non-cash or other than
W-2 compensation, which is great because that is, of course, how you make substantial money."

Our focus here is not on benefits such as Social Security or 401(k) plans, but on benefits such as health insurance, stock options, reimbursement for education, flexible spending accounts, and long-term disability.

The first question Elaine Bedel, CFP, of Bedel Financial Consulting in Indianapolis, Indiana, asks clients when they are considering taking another position is, "What are you giving up from your current employer?" Explains Bedel, "You need to consider vested benefits – not only retirement plans, but stock options. The longer a client has been with an employer, the more difficult it may be to walk away because of what they are giving up. Clients may think that giving up a pension plan where they are not fully vested is no big deal, but they have to consider what contribution is being made for them. In some plans, the longer you have been with an employer, the greater the contribution they make to your retirement. If you go to a new employer, you start with the lowest amount. The question to ask is, ‘Will you have a chance to reach the level you left if this is the last 10 to 15 years of your employment life?’"

Once Bedel’s clients understand what they are giving up, she counsels them to go to their prospective employer and ask them to make up the difference through the benefits program. "This can be accomplished through a signing bonus, stock options, or stock up front," she says. "It’s worth asking the potential employer to sweeten the pot to make your job change worthwhile."

John Gin, CFP, of American Express Financial Advisors in Metairie, Louisiana, agrees with Bedel that it is important to negotiate a new benefits package – and he advises his clients to get any offers from potential employees in writing.

Explains Gin, "I had a client who was a sales manager for a pharmaceutical firm. He was being heavily courted by an upstart company in another state. He was very flattered to be pursued. I worked with him to come up with a list of what he wanted and asked the company to commit to him in writing. To make a long story short, the company was not prepared to go all the way with it. If you are going to take the risk of a job change, you need something more firm than a handshake."

Like Gin, many planners see their clients adversely swayed by their emotions during a job hunt, and they stress the importance of discussing employment alternatives with an impartial advisor to ensure decisions are based on more than emotion. Stewart S. Koesten, CFP, is president of Executive Agents in Overland Park, Kansas. An offshoot of the financial planning practice Koesten Hirschmann & Crabtree, Executive Agents does for high-level executives what an agent does for an athlete.

Explains Koesten: "Executive Agents handles all aspects of corporate career management. Just as a financial planner begins with a financial plan, we start with a career plan – an analysis of a client’s present circumstance, the skills they possess, where they want to go, and what they need to do to get there."

Understanding the seriousness of job negotiations, Koesten’s team of nine includes financial planners, compensation specialists and a psychologist. Because annual compensation is most often in a fixed range, negotiating benefit packages is a key part of what Koesten does for his clients. In the traditional realm, Koesten notes that sign-on and annual incentive bonuses are designed to attract talent, while long-term incentive bonuses are designed to retain employees. However, he stresses that a host of additional benefits can be individually designed and negotiated.

"I had a client who moved an entire kennel of dogs as part of a relocation deal I negotiated – and I’ve done the same thing with show horses and old cars," says Koesten. "For some people, we might be looking for the ability to have their family dog at work, a certain amount of time off or the flexibility to work at home."

Koesten says that the most serious mistakes people make in job negotiations spring from a lack of understanding of the playing field and over-zealousness. "When clients are seeking a position with a company that’s well-known, they can get so enthralled by the opportunity to work for this company that they wig out. That’s where we come in, to take the emotion out of the equation." Koesten’s company also possesses knowledge about industry standards that clients just don’t have the time to research and evaluate.

Across town in Overland Park, Kansas, Sheryl Garrett, CFP, of Garrett Financial Planning, works with younger clients. "I want people to look at a job opportunity and look at the total compensation package, including salary, common employee benefits and retirement plans. When clients evaluate benefits, they have to ask, ‘Is this benefit of value to me? Would I use it?’ If not, it shouldn’t be counted as part of the package."

Garrett notes that young people often are preoccupied with the salary and ignore potentially valuable benefits. "People taking their first job can get so focused on the paycheck that they may miss out on some very valuable benefits that could pay off in the future many times over the base salary," she says. "For example, we have some younger executives at telecommunications companies who were granted stock options that were worth nothing when they took the job but are now hugely valuable."

Accordingly, Garrett seeks to determine the value of stock options. "We’ll do the research, but with startups, that is not always possible," she says. "Options can be worth hundreds of thousands of dollars, or nothing. It may feel to the client like they are throwing a dart, but it’s important not to overlook the opportunity."

Gin, who works with clients who are between 50 and 70 years of age, offers the example of a 51-year-old client who worked for 20 years as an engineer at a Fortune 500 company and was offered an early retirement package. "He’d been getting his Ph.D. on the company’s nickel so that he could one day do consulting on his won," explains Gin. "He saw the early retirement package as an opportunity for him to go out and begin working. However, it’s really competitive out there and I was concerned about how he was going to get clients."

Gin’s solution? "We told the company he’d take the early retirement package if they could guarantee him several years of contract work at a fixed dollar amount. We negotiated two years at a minimum of $100,000 a year. That gives him plenty of breathing room to begin marketing his practice and will ease the transition. My feeling with these packages is that nothing is set in stone. If someone comes to you with an offer, you should consider it, but don’t be afraid to make a counter-offer."

A warning from Bedel on the exit: "A lot of people who participate in a deferred compensation program forget that leaving their employer will often trigger a lump sum distribution that is all taxable in one year. So, rather than spreading the earnings over several years after retirement, it comes all at once and the employee is surprised," she says.

Even outside Silicon Valley, stock options are now standard fare. Despite their popularity, they are still greatly misunderstood and under-used by many employees. Jane King notes, "Remember the classic stories of those who never participated in their 401(k) plans because they were given 50 pounds of paper to read and they never got through it? Stock options are even more complicated and more intimidating. Employees need to have a good financial advisor or accountant on board."

A client of King’s who works with a pre-IPO company recently had to choose between options or restricted stock. "He sent me 52 pages. It was a well-drawn document, but the choices were essentially the same. However, if he put up $7, 000 to buy the restricted stock versus having the same amount of shares he could execute at some point in the future, it would start the capital gains clock ticking sooner – which, of course, could be very nice in a volatile IPO," she explains.

King counsels clients with options to have a plan for exercising them. "The key question to ask is, ‘Do I want 70 to 80 percent of my net worth tied up in company stock?’" she says. "We need to decide if we’ll exercise the options at a particular price or if they’ll be used in making a gift to charity. It’s important to invest some time coordinating these goodies because of the time constraints on them. Two weeks before the date to exercise an option, especially if the client is subject to insider trading rules, I call and ask what they are thinking."

King also points out that benefits such as stock options should not be overlooked in situations like divorce. "I had a client whose ex-husband had restricted stock. It was difficult to get a piece of it because companies hate to have non-employees own that stock, but we got it because he was unwilling to give up something else," she says.

Options can also become so valuable that they can, as Bedel has experienced, prevent a client from taking another job. Bedel also points out that with some plans, you need to exercise your stock options prior to leaving. "In some cases, you need to exercise the options before you give your notice," she comments.

While there’s glamour to stock options, planners say it’s important not to overlook the basic benefits. Comments Isabel Smith, CFP, of Integrated Financial Strategies in Farmington Hills, Michigan, "Options can be wonderful – that’s the case when you hear about Silicon Valley – but many don’t go anywhere. Recently, we’ve been dealing with automotive executives with a lot of options. They didn’t want to exercise the options because of taxes, but now the stock is down a third."

Smith’s work with clients on basic benefits centers on questions such as whether the company has a good health plan. While most pay careful attention to their health plan, Smith finds many people, particularly young people, are likely to overlook disability insurance. Says Smith, "Let’s say a big company like Ford offers so much disability insurance based on how long the employee has been there and on their pay scale. Also, sometimes you can increase your coverage by paying in. Young people never think they will become disabled, but it’s really important coverage. If you can’t work, you can’t earn."

Garrett agrees that health insurance is a critical benefit and spends time going over a client’s options. According to a survey conducted by the Bureau of Labor Statistics, US Department of Labor, just over three-fourths of full-time employees participated in employer-provided medical care plans in both 1995 and 1997, but shifts occurred in the types of plans.

Non-traditional health care plans, such as health maintenance organizations (HMOs) and preferred provider organizations (PPOs), covered 73 percent of the full-time employees with employer-funded medical care benefits in 1997, compared with 63 percent in 1995. From 1991 to 1997, traditional fee-for-service plan coverage of medical care participants declined from 67 percent to 27 percent.

Says Garrett, "Most clients have an HMO and a PPO option in addition to a traditional plan. I advise clients who have doctors to begin by looking to see if their doctors accept any of the plans offered. If their personal doctors are listed, I suggest they call their doctors and ask about their experience with the insurance plan. Also, for my single clients, it’s important to look to the future in terms of what changes and additions to the policy might cost."

If there’s one thing John Gin has learned about negotiating a job offer, it’s that when it comes to benefits, "nothing is written in stone." And as the American job market continues to tighten, it’s certain that employers will put more benefits on the table to attract the most qualified workers.

Today, for example, more companies are offering Section 125 plans or flexible spending accounts. Says Sheryl Garrett, "If a client has childcare costs of $5,000 a year and you run that through the flexible spending account, it might save $1,500 a year in taxes. It may be a hassle to do the paperwork; however, spending a few hours for a $1,500 return is not a bad hourly wage. We find it takes a year or two to get good at using a flexible spending plan. In addition to eyeglasses, dental work and psychologist visits, there are odd things that we can run through the plan. For example, I’ve seen massage therapy run through. Sometimes we don’t think broadly enough to take full advantage of the benefit."

Garrett also sees more companies beginning to offer employees the option of purchasing long-term care insurance, and she encourages planners to review these offers with their clients. Says Garrett: "The University of Kansas Medical Center offers their employees the option to purchase long-term care insurance as a group. Some of the policies are very attractive and we have recommended it in several cases based on clients’ needs. If long-term care insurance is appropriate and the policy good, this is a great way to buy it because the premiums are paid on a pre-tax basis."

As benefits packages get more complex, the planner’s role in helping employees understand their benefits and estimate their worth will become even more important. Planners find that it is very common for employees to not understand and appreciate all the benefits the employer is providing. This is especially important when considering a move from the ranks of the employed to the self-employed. Says Garrett, "I ask my clients to make a list of the benefits they would be giving up. At some point they ask, ‘You mean I have to make 30 percent more than my salary just to break even?’ Then the allure of self-employment isn’t so exciting."

Isabel Smith notes that key to these benefits evaluations will be knowing your clients’ needs and maintaining perspective. "It used to be that you found a job and stayed with the same employer for 30 to 40 years. Now, the typical 25-year-old will have more than seven jobs. Clients need to keep this in mind when looking at a package," she explains. "Clients also need to consider age. Not everyone who is changing jobs is 25 – some are 50 to 55 and they may require looking at health plans differently."

Smith also encourages her clients to keep an ever-mindful eye on their benefits package and to "encourage their employers to explore the possibility of adding additional benefits." This, of course, requires that an assessment of the benefits situation becomes a part of any client review meeting.

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