Employee Benefits: Hard-Won and Ever-Changing Package

If your company provides health insurance, paid vacations or a retirement plan, you can thank a handful of progressive employers from the 1910s and ‘20s.

If your employer doesn’t provide those benefits, you can curse those same men.

The reason that most benefits in America are provided by companies, rather than unions or the government, is because of the efforts of a few powerful business leaders who decades ago decided that private enterprise should be the source of most non-salary perks. Their decision to provide those benefits, and to fight the efforts of labor and government to get into the act, helped shape the employee benefit landscape we have today, experts say.

The beginning of the century marked the center point in a radical, 40-year transformation of the American worker. From the 1880s through the 1920s, the Industrial Revolution transformed the majority of Americans from relatively self-sufficient farm workers, able to at least provide their own subsistence, into city-living factory workers, capable of earning higher wages but also at the mercy of business cycles, layoffs and a foreman’s whims.

Factories and other workplaces used what was called the “drive system”--pushing workers to produce more under the threat of losing their jobs. Turnover was high as foremen readily sacked laggards and employees quit rather than be subject to the humiliation of ever-higher work demands.

A few progressive companies saw the flaws in such a system and began taking a different path. These employers reasoned that reducing turnover could save the company money; long-term, satisfied workers likely would be more productive than workers who lived in fear, while training costs would be reduced, said Sanford M. Jacoby, a professor of management at UCLA and author of “Modern Manors: Welfare Capitalism Since the New Deal” (Princeton University Press, 1999).

American business owners also wanted to prevent the rise of unions and government benefit programs that already had taken root in Europe, Jacoby said. Improved working conditions and better benefits were seen as an inoculation against such perceived ills.

At first, the benefits these vanguard companies offered were quite different than those workers enjoy today. The first pension plan in America was established in 1875 by American Express Co. But by 1920, only a few companies had followed suit, and most of those that did so restricted benefits to white-collar workers.

Instead, employers often focused on non-pecuniary benefits aimed at improving their workers’ moral fiber, filling their free time with wholesome activities and creating a familial feeling in the workplace.

George Eastman of Eastman Kodak hired string quartets to play classical music at lunchtime, reasoning that the melodies would calm and uplift workers. Other companies used home visits to check on sick workers, which often meant being subjected to a lecture on modern theories about housekeeping, nutrition and hygiene.

Some firms created entire towns for their workers, controlling everything from housing design to landscaping. El Segundo, created by Standard Oil in 1911, is one example of a company town. Companies also built their own recreation facilities and even started company unions that gave workers a limited say in decisions that affected working conditions or corporate policy.

World War I brought on a tighter labor market, which led a few more companies to offer pensions and stock bonuses to their skilled workers as well as their white-collar staffs. Still, fewer than 2% of workers in 1920 were covered by company or union pensions.

More than 55% of men over age 65 were still in the work force in 1920; by contrast, that percentage had dipped to 17.8% as of September 1999.

Life insurance and health coverage were sometimes available--Montgomery Ward established the first group plans provided through an employer in 1910--but were more often provided through fraternal societies such as the Polish American Society, the Oddfellows or the Elks. More often, there was no coverage for illness, disability or old age; workers too ill or old to work depended on their families, charities or the occasional beneficent employer for a handout. Efforts to establish mandatory health coverage were attempted, but failed, in 16 states.

As the 1920s-era prosperity began to roar, however, the more progressive companies eased away from heavy-handed paternalism and toward the idea of sharing the wealth with their workers as an inducement--and a reward--for sticking around, Jacoby says. Eastman was a pioneer in this area, having used some of his wealth to endow a disability and emergency loan fund for his workers in 1899 and then starting a profit-sharing plan in 1912.

Eastman was never entirely able to let go of his paternalistic instincts. When he saw how quickly his workers spent their newfound wealth, he put restrictions on the plan that essentially turned it into a long-term savings fund, said Dallas L. Salisbury, chief executive of the nonprofit Employee Benefit Research Institute.

“He would get very frustrated looking out the front window at the parking lot, which would fill up with new cars” as employees spent their share of the profit, Salisbury said. “So he stopped giving them the money [directly].”

Financial rewards such as stock ownership plans, pensions and paid vacations became more popular among companies that were enjoying healthy profits and whose labor costs were relatively low. Bethlehem Steel, General Electric and Standard Oil were among the major industrial employers offering some level of benefits and the promise of steady employment to workers.

The trend was helped along by Congress, which throughout the 1920s established various tax breaks for companies that set up and funded pension and profit-sharing plans.

Although no more than one-fifth of the nation’s industrial workers were employed by firms offering such largess, these employee benefits were considered the future of the American workplace and were expected to be ubiquitous someday, Jacoby said.

The Great Depression quashed those dreams. The stock market crash of 1929 and subsequent economic collapse led to the demise of thousands of companies and an unemployment rate that spiked over 25%. The gross national product fell by half, and many firms that did survive cut back or eliminated their benefits programs.

At the same time, the number of elderly poor soared. The Social Security Administration estimates that in 1934 only half of Americans over 65 were able to support themselves.

This widespread poverty was exacerbated by the trend away from extended families that had accompanied the Industrial Revolution. Those too old or ill to work had fewer family members to care for them; the families that did exist often had little enough to support themselves.

Several states adopted old-age pension plans, based on financial need, but the benefits were typically meager and hard to get. The crisis led to sometimes radical, but often popular, calls for more universal government support.

An unemployed doctor in Long Beach named Francis E. Townsend led a crusade for a $200-a-month pension for workers 60 and over, to be funded by a national 2% sales tax, in what became known as the Townsend Plan. Author Upton Sinclair proposed a plan that would give $50 a month to California retirees who had lived in the state at least three years. Populist Huey Long suggested confiscating property and income from the wealthy to fund massive programs for the elderly and poor. Millions of Americans joined organizations that supported such plans.

The creation of Social Security in 1935 was seen as a relatively conservative measure that would stave off more sweeping welfare programs, but it was still bitterly opposed by many business leaders who saw it as unadulterated socialism. Even the progressive employers who were at the vanguard of 1920s benefit programs worked assiduously to limit Social Security to a bare minimum level of support so that private businesses would have room to offer more, if they chose, Jacoby said.

Although a seminal event for American workers, Social Security was not the watershed that established retirement plans, health coverage and other benefits as an integral part of workers’ compensation. That would come six years later, when the Japanese attacked Pearl Harbor.

Companies faced stunning labor shortages as factories geared up for war production and hundreds of thousands enlisted to fight overseas. At the same time, wage and price controls that accompanied World War II made it difficult, if not impossible, to lift salaries higher to attract workers. So employers turned to fringe benefits, which thanks to a 1939 law, were not taxable to the employee. In 1943, the War Labor Board sanctioned a trend already well underway by ruling that benefits were not subject to the wage freeze.

Prosperity, and labor shortages, continued after the war’s end. By 1950, 25% of private-sector employees were covered by pension plans, and the National Labor Board had ruled that benefits were subject to collective bargaining--a huge milestone in the labor movement and a ruling that kept pressure on employers to offer their workers more.

Employee benefits continued to expand through the 1950s and ‘60s. Employers got a break when Congress clarified in the Revenue Act of 1954 that company contributions to accident and health plans benefiting employees were indeed tax deductible, and in fact always had been.

Congress also took several steps to protect workers’ pensions from fraud, mismanagement and abuse. The most influential legislation was the Employment Retirement Income Security Act of 1974, which established participation, funding and disclosure rules for private pension plans and which established the Pension Benefit Guaranty Corp., which could pay out pensions should a company go bankrupt.

In a less-heralded move, Congress set up rules in 1973 to guide what was expected to be the new age of health-care benefits. The Health Maintenance Organization Act of 1973 outlined the rules for entities that wanted to become HMOs. At the time, the idea was that HMOs would provide comprehensive, affordable care with an emphasis on preventive medicine and policies that supported healthy lifestyles. It would be another 20 years before HMOs would begin to dominate the benefit scene, and cost containment, far more than health maintenance, would fuel their rise.

Labor trends led to other changes in benefits during the 1970s. More women entered the work force. Birthrates declined and the divorce rate increased. Plans designed for single-earner families with children often failed to fit single parents, childless couples, two-earner families or unmarried workers.

Before the 1970s, “the work force was pretty tightly defined as being male, married, with 2.1 children or whatever,” said David Insler, a principal with Deloitte & Touche in Los Angeles.

Choice and flexibility became the buzzwords of the ‘70s. TRW established one of the first “cafeteria” plans in 1973, allowing workers to choose from a menu of benefits options; by the mid-1980s the trend was well established as companies found that such plans were often cheaper than the one-size variety, Insler said. A worker covered by his wife’s health insurance, for example, could drop that coverage at his workplace and save the company money even if he chose to increase another benefit, such as life insurance.

Employee choice extended beyond traditional benefits. Employers began experimenting with company-provided day care, flextime and other “work/life” offerings as employees reported increasing clashes between the demands of work and family. This nascent trend continued to pick up steam in the 1980s and ‘90s, as dual-earner and single-parent families became the norm. Benefits for same-sex couples, largely a ‘90s phenomenon, also trace their roots to the 1970s with the flowering of the gay liberation movement.

“You’re designing benefits today very differently than you would have 10 years ago,” said Larry Tucker, a Newport Beach-based consultant for Hewitt Associates, a leading management consulting and benefits firm.

The world of retirement benefits began another quiet but far-reaching change at the end of the ‘70s. In 1978, Congress established qualified deferred compensation plans that allowed employees a tax break for money set aside for the future, rather than taken as direct cash payments. A Johnson Co. benefits specialist, Ted Benna, used the law to help establish the first 401(k) plan in 1981; the plans were named after the section of the law that allowed them.

Retirement planning would never be the same. In 1980, the number of private-sector employees covered by a pension plan peaked at 35.9 million, or 46% of the work force; by 1990, the percentage had drifted down to 43%. Today, defined contribution plans such as 401(k)s outnumber traditional pension plans by more than four to one, according to Spectrem Group, which tracks benefit trends.

The rapid rise of 401(ks) in the last two decades marks a period where responsibility for retirement, and for managing many other benefits, has shifted back to the worker.

Companies found that their liabilities for future pension benefits were creating a huge drag on their balance sheets, which led to calls to reduce costs. Although the country’s biggest companies continue to offer pensions, small and mid-sized companies have switched to 401(k)s as their primary retirement vehicles. Instead of carrying a liability for future payments on their books for decades, the company can match an employee’s contributions and cash him or her out when employment ends.

The 401(k) is part of another trend--the portability of benefits. The 401(k) made it easier for workers to leave their jobs for greener pastures since, unlike most pension plans, the money could be transferred to the next company’s plan or rolled over into an individual retirement account.

Health benefits have been made more portable as well. In 1985, Congress passed the Consolidated Omnibus Budget Reconciliation Act (COBRA), which requires employers to extend health coverage to workers who are fired or laid off. Lawmakers built on that foundation when they passed the Health Insurance Portability and Accountability Act of 1996, which set national standards that in effect allow workers to carry their health coverage to the next job, so that preexisting conditions and other problems do not trap them in their current posts.

Even traditional pensions are being refashioned to increase portability and contain costs--sometimes at the expense of older workers.

Traditional pensions typically have long vesting periods, fail to pay anything until age 65 and reserve the largest benefits for career employees who accumulate the bulk of their pension payment in their last three to five years of work.

Newer, so-called cash-balance pensions provide faster accumulation for younger workers; the benefits are paid when employment ends. Instead of a reward for longevity, these new pensions are seen as a recruiting tool for employees who are unlikely to collect their gold watches from the company providing the plan. Despite challenges from some lawmakers and employee groups, the experts suspect cash-balance plans are here to stay.

“I think we’re seeing the final demise of the old-fashioned defined-benefit pension with the use of cash-balance pensions,” Insler said.

These changes are another sign that the bond between employer and employee, which Eastman and others had tried to foster since the beginning of the century, is unraveling at the end. Just as personal responsibility for retirement began to return to the worker in the 1980s and ‘90s, the idea of the at-will worker moving from employer to employer echoes the conditions of 100 years before.

Today, however, a tight labor market and the growth of portable benefits have tipped the scales somewhat more in the worker’s favor.

“For the employers today, it’s ‘What have you done for me lately,’ ” Insler said. “For the employee, it’s ‘Pay me the big dollars now, or I’ll go next door for 10% more.’ ”

Whether such conditions will continue into the 21st century depends on a number of factors, from the health of the economy to the demand for workers to the political atmosphere, benefits experts say. Although employer-provided benefits seem firmly entrenched, most of them--from paid vacations to health benefits to retirement plans--are not mandated by law. Rising health-care costs could renew calls for government-provided insurance; employers could drop some benefits.

“What we’ve seen is the continuation of a shift in the work force from manufacturing to service to information, which has resulted in a far more educated worker who is more desirous of controlling their own destiny, and they want more control over their benefits,” Insler said. “If anything, I think that trend will continue.”