01/03/1998

An Overview of Japanese Cafeteria Plans -Objectives and Results

Social Improvement and Life Design Research Department  Senior analyst Tamie Matsuura 

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1. Introduction

A cafeteria plan is an employee welfare system in which employees are allocated points with which they can select benefits from a menu to satisfy their specific needs. This system originated in the U.S. with the aims of containing medical costs and satisfying increasingly diverse employee needs, and has spread to a limited extent among large companies (Figure 1).

 

 

In Japan, against a backdrop of rising mandatory benefit costs (for legally required benefits such as the employer's share of social insurance premiums) and diversifying employee needs, the Ministry of Health and Welfare generated interest in cafeteria plans through its Research Group on Corporate Welfare (1991-93) and Research Group on Cafeteria Plans (1993-94). After the nation's first "Japanese cafeteria plan" was implemented in 1995 by Benesse Corp., many companies began looking into the plan, and several have adopted it.

Is Japan's cafeteria plan a solution to rising mandatory benefit costs and diversifying employee needs? In this paper, we compare cafeteria plans in Japan and the U.S. while looking at the objectives and results of cafeteria plans over their three-year history in Japan.

 



2. The Cafeteria Plan and Employee Welfare Costs

(1) Does the Cafeteria Plan Restrain Rising Mandatory Benefit Costs?

Looking at the ratios of employee benefit costs to cash wages at Japanese companies, mandatory benefit ratio overtook the non-mandatory benefit ratio in 1970, and the gap has since widened (Figure 1). In 1995, the mandatory benefit ratio reached 11.2 percent, while the non-mandatory benefit ratio has remained constant at approximately 5.6 percent.

Moreover, the trend toward fewer children and aging of population ensure that mandatory welfare costs will continue rising.

 

 

The cafeteria plan has been credited with helping to contain medical costs of companies in the U.S. In Japan, where large companies are particularly burdened by rising mandatory employee welfare costs, the plan's perceived effect of containing costs is no doubt alluring.

However, will the cafeteria plan truly solve the problem of rising mandatory employee welfare costs for Japanese companies? To answer this question, we first need to grasp the differences in employee welfare cost structures between Japan and the U.S.

(2) Employee Benefit Cost Structures in Japan and the U.S.

The ratio of employee benefit cost to cash salary is slightly higher in the U.S. (19.3 percent) than Japan (16.8 percent). Breaking down employee benefit costs into mandatory and non-mandatory costs, we find that mandatory costs comprise the majority in Japan (66.5 percent) but only 41.2 percent in the U.S., where non-mandatory costs are greater (58.8 percent). Furthermore, in Japan over half of non-mandatory costs consists of housing costs, while in the U.S. 81.9 percent of non-mandatory costs consist of medical insurance (Figure 3).

 

 

(3) The Cafeteria Plan and Medical Costs in the U.S.

Since only one-fourth of the U.S. population is covered by public medical insurance, companies play an important role in providing medical insurance to employees and their families. Since the 1980s, to contain rising medical costs, traditional types of medical insurance have been augmented by new "managed care" forms of medical insurance (in which medical institutions are networked and a fixed number of patients guaranteed to control medical costs) such as HMO (health maintenance organization) and PPO (preferred provider organization).

To contain rising medical costs, U.S. companies offer several types of medical insurance in their cafeteria plans. The less cost-effective traditional forms of medical insurance cost more points than managed care medical insurance, and also cost correspondingly more in premiums. By setting points in this way, companies have been able to induce employees to shift to more cost-effective forms of medical insurance.

In this way, cafeteria plans combined with managed care medical insurance have helped contain corporate medical costs to an extent.

However, some U.S. companies interviewed by the author admitted that when not only medical costs but operating costs are considered, cafeteria plans costs do not always come out ahead. This point needs to be kept in mind when discussing the cost effectiveness of cafeteria plans in the U.S.

(4) Scope of Cafeteria Plans in Japan

In Japan, all persons are covered by public health care, and health insurance premiums are included in mandatory employee benefit expenses. Naturally, mandatory employee benefit costs, which have been rising year after year and now comprise 66.5 percent of total benefit costs, cannot be included in cafeteria plan menus. Since the only discretionary area left for Japanese companies to control costs is in non-mandatory benefits, which comprise a small portion of total benefit costs, cafeteria plan menus are also likely to be limited to non-mandatory benefits.

Moreover, not all non-mandatory benefits are suitable to be menu choices (Table 3). For example, single-person and family housing, which comprise the majority of housing costs, are often closely linked to personnel transfer policies. In addition, considering the intended aim, money paid out for condolences or congratulations is not appropriate as a benefit, nor are cultural, sports, and recreational activities intended to increase workplace solidarity. When companies own housing and other facilities, the associated benefit choices may not be very cost-effective due to a loss of economy of scale. Excluding these measures from the non-mandatory benefits would further limit the scope of menu choices in Japanese cafeteria plans.

 

 

Thus if a Japanese cafeteria plan is designed within the context of employee benefits, the scope of the menu is significantly limited.

Furthermore, even if such limited cafeteria plans are implemented, there remains the question of whether costs can be contained. Theoretically, a ceiling on point allotments should limit costs. However, there is no guarantee that the point ceiling can be maintained in the future, particularly if employees or unions demand increases.

If we also consider the operating costs associated with the menu choices, the Japanese cafeteria plan has a limited effectiveness in containing mandatory benefit costs, a major part of total employee benefit costs.

 



3. Satisfying Diverse Employee Needs

(1) Do Cafeteria Plans Accommodate Diverse Employee Needs?

To meet the increasingly diverse needs of employees, companies need to introduce new benefits. However, costs can be prohibitive.

The cafeteria plan sets a point ceiling but enables employees to choose their desired benefits from a menu. Companies can thus contain the total cost while at times expanding the menu.

The U.S. companies interviewed in our survey highly valued this ability of cafeteria plans to accommodate the diverse needs of employees.

(2) Japanese Cafeteria Plans and Diversifying Employee Needs

As explained earlier, when Japanese companies introduce a cafeteria plan, the benefit choices they can offer are limited to some non-mandatory categories. In addition, with mandatory benefit costs rising, companies are hard pressed to expand non-mandatory benefits. Under these circumstances, considerable ingenuity is needed to meet the increasingly diverse needs of employees.

Some companies that have already introduced a cafeteria plan report that their employees are using only half the allotted points. In addition, some managers lament that their employees show less than expected interest in the cafeteria plan.

Table 4 lists the major cafeteria plans introduced at Japanese companies, along with menu categories. While the plans contain many creative menu choices within the narrow range allowed, more time is needed to ascertain whether they satisfy the diverse needs of employees.

 



4. Objectives of Japanese Cafeteria Plans

(1) Objectives of Plans Already Implemented

Thus far, we have looked at the objectives and results of Japanese cafeteria plans from two viewpoints − controlling rising mandatory benefit costs and meeting diverse employee needs. Below we consider the actual objectives companies had in mind when they introduced cafeteria plans.

1. Response to rising non-mandatory benefit costs and diverse employee needs

In the backdrop and objectives column in Table 4, while cost control does not appear as the primary objective, almost all companies mentioned the objective of accommodating diverse employee needs. Related to this objective, companies also cited objectives such as enabling employees to make their own choices, and simplifying menu alterations without changing total benefit costs.

Other objectives included ensuring fairness among employees and enhancing recruitment and corporate image. Cafeteria plans were also introduced to coincide with personnel system reforms and a corporate rebuilding campaign.

 

 

2. Ensuring fairness among employees

In conventional benefit plans, fairness can sometimes be difficult to achieve. For example, some employees may be too busy with work to use the company resort, while others with more free time can visit often.

By offering busy employees other benefits to choose from, a cafeteria plan can ensure greater fairness. At Seiyu, which has adopted flexible employment policies including mid-career hiring, the cafeteria plan has ensured that benefits are fair regardless of when people enter the company.

3. Enhancing corporate image and recruitment

Companies that have introduced cafeteria plans have received considerable press coverage. Being known for introducing the most advanced choice-based system from the U.S. can not only boost a company's image but help recruitment. One company actually introduced a cafeteria plan with this objective in mind.

4. Fostering a new corporate culture

Some companies have introduced cafeteria plans in tandem with a shift to merit-based personnel systems. The reasoning is that the cafeteria plan's emphasis on choice makes it better suited to merit-based personnel systems than a conventional benefit plan, which emphasizes conformance.

One company introduced a cafeteria plan as part of a corporate rebuilding campaign, while another did so establishing a new mutual aid society, and another reviewed the efficiency of its existing system.

(2) Changing and Diversifying Objectives of Japanese Cafeteria Plans

As we have seen, while Japanese cafeteria plans are less effective in controlling mandatory benefit costs than first thought, they have been introduced under a variety of objectives such as accommodating diverse employee needs, ensuring fairness, enhancing corporate image and recruitment, and fostering a new corporate culture.

According to one manager, a proper evaluation of the system will take at least a decade. Since the cafeteria plan is only three years old in Japan, more time will be needed to evaluate the results.

In this paper, we have attempted to trace the evolution of cafeteria plans since their introduction in Japan three years ago. Cafeteria plans are still in a trial stage as their objectives change and grow more diverse. Further developments will be followed with keen interest.

 

 

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Social Improvement and Life Design Research Department    Senior analyst

Tamie Matsuura

Research field

03-3512-1878

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