A THEORETICAL EXPLORATION of the Adoption and Design of Benefit Plans
Transcript of A THEORETICAL EXPLORATION of the Adoption and Design of Benefit Plans
-
8/15/2019 A THEORETICAL EXPLORATION of the Adoption and Design of Benefit Plans
1/21
' Academy ol Monagement Review
1998,
Vol. 23, No. 2, 305-324.
A THEORETICAL EXPLORATION OF THE
ADOPTION AND DESIGN OF FLEXIBLE
BENEFIT PLANS: A CASE OF HUMAN
RESOURCE INNOVATION
MELISSA W BARRINGER
University of Massachusetts at Amherst
GEORGE T MILKOVICH
Cornell University
Hong Kong University of Science Technology
In this article we explore theoretical explanations of managers' decisions about flex-
ible benefit pl ans . First, we exa min e the adoption an d desig n of flexible benefit pla ns
throu gh four theoretic le nse s: (1) institu tiona l, (2) resou rce d epe nde nce , (3) age ncy,
and (4) transac tion cost. We then integra te the relevant insights ga ined from these
theories into a more complete model and derive propositions for future research.
Finally, we generalize the insights gained from exploring a specific innovation to
broader questions surrounding decisions about other human resource innovations.
In the early 1970s only a handful of co mp an ies
offered flexible benefit plans. Today, an esti-
ma ted one-third of organizations w ith more than
1,000 employees offer flexible benefits (Hewitt
As soc iates, 1995). Early pla ns w ere relative ly
sim ple, offering few cho ices an d lim ited flexibil-
i ty. Current approaches range from a simple
offering of pretax salary reductions, to pay for
benefi ts, to highly complex plans with many
options.
Beyond surveys of firm practices, scholars have
devoted little attention to these developments.
Very little research has been done to gain an un-
derstanding of why some firms adopt and others
do not or why some plans offer more choices than
others. We know virtually nothing about why the
variety of these plans has increased over time.
What objectives ar e achieve d? How do employe es'
attitudes, competitors' practices, rising benefit
costs,
and shifting regulatory conditions affect
management's decisions?^
We thank Anurag Sharma, Tony Butterfield, Pamela Tol-
bert, Madan Pilitula, and three of
AMR s
anonymous review-
ers for their invaluable comments on earlier drafts of this
article.
' When referring to decision s to adopt a nd d esign flexible
plans, we mean those organizational decisions made by
top-level management. For simplicity, we use the term
man agem ent 's decis ions in the art icle .
Our purpose is to explore the insights offered
by organization theories and research. Specifi-
cally, we first examine management 's adoption
and design decisions through four theoretic
len ses : (1) institutiona l, (2) resou rce de pe nd en ce ,
(3) age ncy , an d (4} tran sac tion cost. We then
integrate the insights gained from these theo-
ries and related research into a more complete
model, with testable proposit ions for future
empirical work. Finally, we generalize these
insights to other human resource (HR) innova-
t ions.
The principal contributions of our article are
threefold. First, by integ ratin g th e insig hts of mul-
tiple theoretical pers pec tives, we offer a m ore par-
s imonious model of management ' s decis ions
about flexible benefits and a set of testable prop-
ositions that can guide much-needed research.
None of the four theories considered here includes
th e full set of variables that may affect manage-
ment's decisions about employee benefits. Each
theory offers unique insights, although there is
also some ov erlap. Second, our model and analy-
sis offer a platform for understanding why or-
ganizations adopt other HR innovations. Third, we
bring together a diverse body of literature on flex-
ible benefit plans around theoretic perspectives.
Currently, the literature is largely segm ented into
benefi ts administrat ion, survey evidence, and
academic research.
5
-
8/15/2019 A THEORETICAL EXPLORATION of the Adoption and Design of Benefit Plans
2/21
6
cademy of Management Review
April
To acc om plish our three objectives, w e first
describe flexible benefit plans and review the
related l i terature and rese arch. Next, we p resent
a briei overview of the four theories and high-
light their relevance to flexible benefits deci-
sions. Following this overview, we ofier our in-
t eg ra t ed model based on spec i f i c i n s igh t s
gained from these theories, and we derive test-
able proposit ions. We conclude by discussing
the poten tial to generaliz e our id eas to other HR
innovations.
FLEXIBLE BENEFIT PL NS
Flexible Benefit Plans Defined
Definitions of benefits vary considerably. The
narrowest definit ion includes only those bene-
fits not underwritten or paid for by the govern-
ment, such as health insurance or private pen-
s io ns (Beam & M cFa dde n, 1996). Bro ader
definitions includ e virtually an y iorm of com-
pensation other than direct wages paid to em-
ploy ees {Rosenbloom, 1996: 3) and en co m pa ss
benefits that range from commonly observed re-
t irement and insurance plans to unique offer-
ings, such as spiritual counseling or fruit from
the orchard (Employee Beneiit Research Insti-
tute,
1995).
Definitions of flexible benefit plans are less
ambiguous, and the list of forms that are in-
cluded in such plans even more narrow. In gen-
eral , any plan that al lows employees to make
choices about the benefits they receive is con-
sidered to be a flexible benefit—or cafeteria—
pla n (Beam & M cFadd en, 1996; Rosenbloom,
1996). For the purposes oi this article, we use the
dei initio n set out in Sec tion 125 of the In tern al
Revenue Code. Specifically, we deiine flexible
beneii t plans as those that offer employees a
choice between quali i ied (nontaxable) benefi ts
an d c as h (Beam & Mc Fadden, 1996). A pla n that
does not offer a cash option—for example, a
plan that simply ofiers a choice oi medical
plans—is not considered a flexible benefit plan
under this deiinition, whereas a plan that offers
the option of payi ng for a (qualified, non taxa ble)
beneii t with pretax wages (cash) is (Borleis,
1996).
Although the options that can be included in
ilexible benefi t plans are somewhat l imited, the
plans incorporate a variety of different designs,
ranging in the amount oi flexibility (choice) and
the costs to the employer. We include four gen-
eral types of design s that are con sistent with the
IRS definition ad opt ed for us e in this artic le:
(1) salary reduction only, (2) modular options,
(3) core plu s o ptions, an d (4) mix an d ma tch. W e
summarize the four plan designs in Table 1
(Beam & M cFa dde n, 1996; Em ploye e B eneiit Re-
sea rch Institute, 1991). As we sho w in the ta ble ,
costs to the employer increase as the amount of
flexibility inc rea se s (Beam & McFa dden, 1996).
Hence, costs and flexibility are lowest under the
salary-reduction-only design and highest under
the mix-and-match design.
The Appeal of Flexible Benefit Plans
Flexible benefi t plans represent a substantial
departure irom the tradit ional , one-size-i i ts-al l
ph i losophy, where managers made decis ions
about the type and level oi benefi ts employees
received and al l employees were covered by the
same benefi ts. First introduced in the early
1970s, this in nova tive p ractic e did not start to
gain popularity until the mid 1980s (Hewitt As-
soc iate s, 1995). The num ber oi ad op tion s in-
cre as ed by 127 perc ent bet w ee n 1983 an d 1984
and has cont inued to increase s teadi ly , a l -
thou gh the rate h a s slowe d sinc e 1989. Cur-
rently, about 70 percent oi firms that oiier ilexi-
ble benefit plans are in the service industry
(Hewitt A ss oc iat es , 1995). The sim ple r, low-
flexibility type of design (salary reduction only)
seems to be the most widely used, al though the
incidence of the highly flexible plans seems to
be increasing (Employee Benefit Research Insti-
tute,
1995; He witt A ss oc ia tes , 1995).
Managers most frequently ci te two objectives
in their decisions to adopt flexible benefit plans:
(1) to enh an ce their emp loyees ' bene ii ts sat isfac-
tion or (2) to help con tain rising ben eiits costs
(Employee Benefit Research Institute, 1995). The
premise underlying the first objective is that as
the diversity of the workforce has increased, so
too has the d ivers i ty o i employees ' benef i t s
needs. Allowing employees to select a package
that meets their individual needs has increas-
ing appeal . In addit ion, f lexible beneii t plans
hold the promise of containing costs by moving
from a deiined beneiit (in which a certain pack-
age of benefits is promised, regardless of cost) to
a defined contribution (in which a certain level
oi benefi ts expenditures is promised, regardless
oi what the funds can purchase; Employee Ben-
-
8/15/2019 A THEORETICAL EXPLORATION of the Adoption and Design of Benefit Plans
3/21
-
8/15/2019 A THEORETICAL EXPLORATION of the Adoption and Design of Benefit Plans
4/21
8 Academy of anagement fleview
April
to the presence oi flexible benefits (Cable
Judge, 1994).
Explaining Variation in Decisions About the
Adoption and Design of Flexible Benefit Plans
The high costs of plan design and implemen-
tat ion, ever-changing regulations, paternalist ic
concerns about employees ' capaci ty to make
sound decisions, and actuarial concerns about
disproportionate part icipation rates among op-
t ions (adverse selection) have been oiiered as
reasons why more organizations have not im-
plemented flexible benefits (Beam McFadden,
1996; Bloom Tr ah an , 1986). Tha t som e org an i-
zations are deterred by these obstacles and oth-
ers are not suggests that decisions about the
plans are also affected by contextual factors.
To better understand these iactors, we turn
next to explore the insights offered by organiza-
tional theories. We have selected iour: (1) insti-
tutional, (2) resource dependence, (3) agency,
an d (4) tran sac tion cost . Our selec tions ar e
ba sed on two related cri teria. First, we co nsider
benefi t plans to be at tr ibutes of organizations,
akin to other organization proce sses a nd struc-
tures, such as iniormation system s, organization
design, or hierarchical arrangements. The or-
ganization is the basic unit oi analysis. Conse-
quently, we do not include such theories as ex-
pectancy and procedural just ice, because they
tend to iocus on the individual as the unit of
ana lysis . Agency theory also focuses on individ-
ua l s ,
but the unit of analysis is the contract
be tween p r inc ipa l s and agen t s (E i senhard t ,
1989).
Second, we have selected theories that al-
ready have been useiul in offering explanations
of other pay and beneii ts practices. Eisenhardt
(1988), for instance, has iound that both the
agency and inst i tut ional models part ial ly de-
scribe variat ion in the pay policies for s ales per-
sons at retai l stores. Similarly, Pfeffer and
Davis-Blake (1987) show that the resource de-
pende nce perspect ive helps explain var iat ion in
the wages paid to univers i ty adminis t rators .
G ood stein (1994) an d In gra m an d S imo ns (1995)
have appl ied the resource dependence and in-
s t i tu t ional mode ls to exp lain org aniz at ions '
work-family practices, and Williamson (1981)
suggests that management ' s decis ions about
pensions may be related to transaction costs.
CURRENT ORGANIZATIONAL THEORY
A REVIEW AND COMPARISON
In this section we describe and analyze the
four relevant theories. We sum ma rize the re sults
in Table 2, which contrasts the basic premises,
key assumptions, implications, and l imitat ions
o i t h e i n s t i t u t i o n a l , r e s o u r c e d e p e n d e n c e ,
agency, and transaction cost models. Based on
this analysis, we then derive a model that inte-
grates the ins ights gained .
Institutional Theory
As we note in Table 2, those with the institu-
t ional perspective posit that organizations wil l
adopt an innovation, even if technically inefii-
cient, in order to gain legitimacy and, hence, the
resources necessary to ensure thei r surv ival
(DiMaggio Powell, 1983; Meyer Rowan, 1977;
Zucker, 1987). Or gan izatio ns ma y ad opt prac -
t ices voluntari ly, in response to pressures to
conform to accepted standards oi practice, or
involuntarily, in response to coercion by power-
iul institutional iorces that control critical re-
so urc es (DiM aggio Po we ll, 1983; Scott, 1987;
Tolbert Zucker, 1996). Pro pon en ts of this theo ry
dist inguish between early, or preinst i tut ional ,
adopters, who introduce an innovation based on
its capacity to improve organizational perfor-
mance, and later adopters, who, when the prac-
tice has become semi- or fully institutionalized,
are more l ikely to behave according to prevail-
ing practice (DiMaggio Powell , 1983; Tolbert
Zucker, 1996).
The capacity of the institutional model to help
explain variat ion in organizational structures is
supported by several studies, including many in
which the authors examine innovative pay and
beneii t practices (see, ior example, Powell
DiM agg io, 1991; Scott, 1987; To lbert Zuck er,
1996, ior reviews oi this literature). The theory
has been used to explain organizations' iamily-
iriendly polic ies (Goodstein, 1994; Ingra m
Sim ons, 1995; O ste rm an , 1995), child ca re pro-
grams (Kossek, Dass,
DeM arr, 1994), exe cu tive
com pen satio n (W estphal Zajac, 1994), an d the
compensation oi retai l sales personnel (Eisen-
hard t, 1988). Ne verthe less, ins titutiona l theory
does not iul ly explain variat ions in these prac-
tices and structures. Critics note that it iails to
take into account the importance oi the organi-
-
8/15/2019 A THEORETICAL EXPLORATION of the Adoption and Design of Benefit Plans
5/21
1998 Barringer and
Milkovich
309
0)
a
o
01
I
0)
G
3
O
M
E
Ul
d
13
S c
1 d G 1)
«
di
3 d
G
3
.
O
E
E d
0 "-
-=: a
•5
a
X
2
O
U) (T
0) O U
|
g
O
0)
d
K
d >
o
i .-• G
g ^
>•
u y
d - B l
G
O Q) •
1 3
G
d
0.y
S
S ^ O
s § : 2
0 dTJ
G
O 1-
o
di.S
S —
d
d
d i3
g
:^ Ul
^
^ G
o
5 o
4=
a u
dS
S
u
S
d tri 0
^
ad-a _
^ O
II
i-f-
•
0
0
>
d
5^^
0
"a
0
0
o
y
>,_tn
S2
0 n O.
E
o
5
B-
a o
TI
G
D
Q)
tn
>
d
ui
tn
Z
g -I
g'u
5JU1
o
<
II
o
0
01
0
G
O
- d
tn
G
o
d
N
'G
d
0
U
'3
x :
u
0
o
&°^0
G
> « O
C
-
8/15/2019 A THEORETICAL EXPLORATION of the Adoption and Design of Benefit Plans
6/21
310
cademy of Management Review
April
zations' strategic goals and self-interests (Di-
M agg io, 1988; O live r, 1991).
The ins t i tu t ional model seems to provide
fuller explanations of organizational structures
when integrated with other theories. Research-
ers have integrated the insights offered by the
institutional model with those offered by re-
source de pe nd en ce {Goodstein, 1994; Ingram &
Sim ons , 1995; Oliver, 1991), ag en cy {Eisenha rdt,
1988),
an d tra nsa ctio n cost (Pouder, 1996; Roberts
& Gre enw ood, 1997) mo dels. We are aw ar e of no
research that has a t tempted a comprehensive
integration of the unique insights offered by all
four theories.
The resource dependenc e, agency , and t rans-
action cost perspectives al l suggest that expec-
tations about efficiency drive decisions about
such structures as flexible benefit plans. Fur-
thermore, as Table 2 indicates, the models sha re
some key var iab les a nd as sump t ions . Yet, each
focuses on different types of efficiency gains,
thereby offering unique insights into the factors
affecting management 's decisions about f lexi-
ble benefit plans. For the purposes of this arti-
cle, we group the three theories into one cate-
gory focusing on expected efficiency gains.
Expected Efficiency Gains
Resource dependence theory In Table 2 we
note that the resource dependence model as-
sumes that management ' s decis ions are heavi ly
influenced by internal and external agents, who
control critical reso urc es (Pfeffer & Sala ncik ,
1978). Internally, certain positions or employee
groups controll ing cri t ical resources can, theo-
retically, impose preferred structures on their
org an iza tion s (Pfeffer & Sala ncik , 1978). Balkin
and Bannister (1993) argue that employees hold-
ing critical jobs in an organization can influence
decisions about forms of pay (salary, incentives,
bene fits, and the like). High pay and attra ctiv e
benefits, in turn, can attract and retain those
individuals having the greatest abil i ty to obtain
cri tic al re so ur ce s {Pfeffer & Da vis-B lake , 1987).
External agents may control funds (e.g., gov-
ernmen t con t rac t ing agenc ies ) o r per sonne l
(e.g., unions) and can exert pressure on an or-
ganiza tion to adopt certain structures by l inking
com plia nc e with reso urc e alloc ation (Pfeffer,
1981;
Pfeffer & Sala ncik , 1978). Th es e ex ter na l
pressure s bear a remarkable resem blance to the
insti tut ional mod el 's coercive press ures, an d
dis t inguish ing between the two models ' expla-
nations of organizations' structures, therefore,
ca n b e difficult (Tolbert & Zuck er, 1996; Zuck er,
1987).
As Oliver (1991) and others point out, how-
ever, the resource dependence model views or-
gan iza t ions as r espond ing more s t r a t eg ica l -
ly— or au tonomous ly— to ex te rna l p res su re s
than does the in s t i t u t iona l model . Hence ,
whereas both models consider external pres-
sures ,
the resource dependence model also con-
siders characterist ics of the organizations that
affect the extent to which decision makers ac-
t ively manage the pressures , versus pass ively
com ply w ith them {Gre ening & Gra y, 1994; Oli-
ver, 1991). Goodstein {1994), for example, found
that resis tanc e to pre ssu res to adopt family-
friendly policies varied with the percent of
women in the organization 's workforce.
Empirical research generally has supported
resource dependence-based explanat ions of or-
ganizational structures. Pfeffer and Davis-Blake
(1987), for instance, found that pay-level deci-
sions for employees occupying the same posi-
t ion in different organizations could be ex-
plained partially by differences in the role the
posit ion played in the acquisi t ion of monetary
resources. As noted above, in a number of stud-
ies ,
scholars have successfully integrated the
resource dependence and ins t i tu t ional models
to explain, part ial ly, a variety of organizational
practices, including benefi ts.
Agency theory. The focus of the agency model
is on the design of optimal employment con-
tracts. The model 's premise is that the interests
of principals may conflict partially with those of
the agen t s and tha t compensa t ion packages
should be designed to motivate employees to
act in the best interests of the principal (Jensen
& Meckling, 1976; Ross, 1973). Outcome-based
contracts provide powerful incentives for agents
to be as productive as possible, but when out-
comes are uncer tain , agents wi ll demand h igher
pay to offset attendant risk. Behavior-based con-
tracts shift the risks to the, presumably, risk-
neutral principal , but when information about
agent effort is difficult to obtain, incentives for
agents to work in the best interests of the prin-
cipal are weak. When outcome uncertainty is
high
and
monitoring employee productivity is
difficult or costly, optimal contracts are more
difficult to des ign . A po ssib le so lution to this
dilemma is to pay so-called efficiency wages—
tha t is , w ag es tha t a re above the marke t -
-
8/15/2019 A THEORETICAL EXPLORATION of the Adoption and Design of Benefit Plans
7/21
1998
airinger and Milkovich
3U
cl ea ri ng r at e {Na lban tian , 1987; Stiglitz, 1987).
Paying these h igher wage s creates an incentive
for employees to work at least hard enough to
kee p their jobs. At the s am e time , their pa y is not
dependent upon the outcomes of their efforts,
which can be affected by factors other than em-
ployee effort.
We suggest that the agency and efficiency
wage concept, which has been applied most
frequently to issues of direct pay, can be ex-
tended to total compensation (pay plus benefits).
Base pay and benefits that are not tied to per-
formance generally are considered to have a
weak or indirect impact on motivation (i .e. ,
through promotions). This prem ise su gge sts that
base pay and benefi ts are tied to continued em-
ployment, which, if high enough, will induce
employees to work at least hard enough to keep
their jobs (Sh apiro & Stiglitz, 1984). A sim ilar
argument is made by Shepard, Clifton, and
Kruse {1996), w ho app ly th e efficiency w ag e th e-
ory to ex pla na tion s of dec ision s to adop t flexible
work hours. The authors argue that employees
who value flextime will prefer to work in or-
ganizations that provide it and will work hard
enough to keep such employment because the
cost of being fired {and losing flextime) is high
{Shepard et al., 1996).
In a large body of research, scholars explore
the implications of agency theory for employee
com pen satio n (see Eisen hard t, 1989, for a re-
view).
In general , these scholars support the
agency model. Once again, many of the authors
use both agency and companion theories to ex-
amine research hypotheses—an approach sup-
ported by Eisenhardt , who argues that agency
theory pre sen ts a pa rtia l view of the world
that, alth oug h valid, also igno res a good bit of
the com plexity of org an iza tion s (1989: 71). Sp e-
cifically, agency theorists tend to overempha-
size efficiency explanations of organizational
structures and neglect the inst i tut ional context
in which they are estab lishe d (Kalleberg Reve,
1993;
Nila kan t & Rao, 1994).
Transaction cost . Those having this perspec-
t ive assume that organizations establish struc-
tures minimizing the costs of their transactions
(the exchange of goods or services) with other
part ies when the potential for opportunist ic be-
hav ior is high (W illiamson, 1981). In the ca se of
HR transactio ns, the potential for opportunist ic
behav ior is related to two important huma n
ass et chara cterist ics. First , whe re cri t ical skil ls
specific to the organization a re acqu ired primar-
ily on the job, turnover can be costly, and or-
ganizat ions adopt in ternal governance s t ruc-
tures to stabil ize employment. Second, where
individual productivity is difficult to monitor,
organizations adopt governance structures to
provide incentives for employees to act in the
or ga niz ati on s' int ere sts (W illiamson, 1981: 564).
To the extent that employees value flexible ben-
efits, adopting the plans increases the value of
continued employment, hence reducing volun-
tary turnover and shirking.
Transa ction cost exp lana tions of organization-
al structures have, for the most part, been sup-
ported by research (see Klein Shelanski, 1994,
for a review). Much of the work has focused on
vert ical integration; however, authors hav e use d
the model to explain a variety of governance
is su es {Klein & Sh ela nsk i, 1994). W illiam son
{1981) ar gu es th at tra nsa ction costs can also ex-
plain the adoption and design of specific HR
practices (such as flexible benefits), yet empiri-
cal evidence in this area is limited. In one study
researchers found that the extent of transaction
costs,
such as firm-specific training, can help
explain the adoption of contingent work ar-
ra ng em en ts (Davis-Blake & Uzzi, 1993). In re-
spon se to cr i tic ism that the model n eglec ts
contextual variables, such as power and inst i tu-
t ional pressures, researchers recently have com-
bined transaction cost explanations with other
perspectives, most notably inst i tut ional theory
{Pouder, 1996; Ro ber ts & G ree nw oo d, 1997).
Summary Sources of Con vergen ce and
Divergence
As Table 2 i l lustrates, there are both conver-
gence and divergence in the insights offered by
the individual theories. The potential for inte-
grating the four theories without creating redun-
dancy and incongruity, therefore, may seem lim-
ited. Yet, a recurring theme in the empirical
l i terature is that r icher explanations of organi-
zational structures can be derived by integrat-
ing the insights of mult iple theoretical perspec-
t ives. Oliver (1991) ar gu es that con verg enc e
demonstrates the potential for integrating com-
p l e m e n t a r y e x p l a n a t i o n s o f o r g a n i z a t i o n a l
structures into a single model. Further, diver-
gence highlights the underlying assum ption s
about organizational behavior that are not ac-
knowledged by a s ingle theory and demon-
-
8/15/2019 A THEORETICAL EXPLORATION of the Adoption and Design of Benefit Plans
8/21
312
Academy
oi
anagement
eview
April
strate s the value of integra ting mult iple theories
(Oliver, 1991: 146).
Although all four perspectives assume that
management ' s decis ions about s t ructures are
constrained by environmental condit ions, they
differ in assumptions about the nature of those
const rain ts . External pressures are assumed to
be the primary source of influence on decisions
under the inst i tut ional model, whereas internal
conditions related to the nature of the work con-
st i tute the primary constraints under the agency
and transaction cost models. The resource de-
pendence model assumes that in ternal
and
ex-
ternal agents impose const rain ts on decis ions
about structures. Further, both the agency and
transaction cost models assume that constraints
arise as a result of goal conflict, information
asymmetries, and the tendency of people to act
in their own self-interest.
Differences in assumptions about organiza-
t ions' responses to environmental constraints,
as we note in Table 2, are p erh ap s the m ost
striking. Organizational interest and agency are
assumed to play an important role in determin-
ing these responses under the resource depen-
dence, agency , and t ransact ion cost models .
These rat ional mod els al l ass um e that organi-
zat ions act ively manage environmental con-
s t rain ts , adopt ing s t ructures that ensure the
flow of resources, or minimize agency or trans-
action costs. Hence, the primary source of influ-
ence on management ' s decis ions under these
persp ective s is what we refer to as expected
efficiency ga ins. The institution al model, how-
ever, assumes that organizations do not exercise
active choice; rather, they more passively con-
form to their environments. Organizations theo-
ret ical ly adopt s t ructures that enhance thei r
legit imacy in the external environment, regard-
less of the impact on the technical efficiency of
in ternal operat ions . Thus, ins t i tu t ional pres-
sures are the primary source of influence on
management ' s decis ions about such s t ructures
as flexible benefits.
We argue that the integration of the four the-
oretical perspectives is not only feasible but
necessary to understand decisions about f lexi-
ble benefit plans. All of the theories seem to
offer insights, yet none offers a full explanation.
On the one hand, inst i tut ional theory has been
criticized for ignoring the role of organizational
inter est an d ag en cy (DiM aggio, 1988; Oliver,
1991). The agen cy a nd t ran sac tion cost mo dels .
on the other hand, have been criticized for over-
emphasizing efficiency and ignoring social con-
text va ria bl es {Eisenhardt, 1989; Ka llebe rg &
Reve , 1993; Nila kan t & Rao, 1994). Fur ther, al-
though the resource dependence, agency , and
transaction cost models al l suggest that ex-
pected efficiency gains drive decisions, each fo-
cuses on different types of gains. In response to
these cr i t ic isms, researchers have in tegrated
different combinations of the theories. We are
aware of no research that has at tempted to in-
tegrate the unique and tenable insights of al l
four models. Accordingly, we take the logical
next step and propose a model for explaining
managemen t ' s dec i s ions abou t the adop t ion
and design of flexible benefit plans, integrating
the insights of the inst i tut ional , resource depen-
dence, agency, and transaction cost theories.
AN INTEGRATED APPROACH TO EXPLAINING
THE ADOPTION AND DESIGN OF FLEXIBLE
BENEFITS
As dep icted in Figure 1, we hypo thesize tha t
management 's decisions about f lexible benefi ts
are influenced prim arily by two factors: (1) insti-
tutiona l pre ssu re s and (2) exp ected efficiency
gains. These two factors provide the framework
for our discussion of the model. First, we exam-
ine the theoretical premises underlying each of
the factors. We identify antecedent variables
that are l ikely to shape the strength and direc-
tion of each factor's effects on management's
decisions about the adoption and design of the
plans , and we develop tes tab le proposi t ions .
Second, we examine variables that affect the
relat ive strength of the two primary factors,
again developing a set of related proposit ions.
Institutional Pressures
The inst i tut ional model suggests that internal
decisions about structures are heavily influ-
enced by pressures in the external environment
(Go odstein, 1994; Ingr am
Sim on s, 1995). Below ,
we outl ine the ways in which inst i tut ional pres-
sures to conform to such practices as flexible
benefi ts are generated theoretically.
Antecedents of
institutional pressures: Com-
petitors
practices. As a practice becomes more
diffused, organizations increasingly view i t as
standard—or best—practice, theoretically tying
an organization 's legit imacy and abil i ty to ob-
-
8/15/2019 A THEORETICAL EXPLORATION of the Adoption and Design of Benefit Plans
9/21
1998
arringei a nd Milkovicb
313
FIGURE 1
An Integrated Model of Organizations De cisions About Flexible Benefit Plans
Labor
market
conditions
Nature
o
the work
Competitors'
practices
Coercive forces
•Legislation
•Unions
Benefits
objectives
Uncertainty about
goals and technology
Organizational
Interconnectedness
Expected efficiency gains
Organization size
•• Stage 0 1 ^ ^
\institutionalizatioiv
Decisions about flexible benefit plans
•Adoption
•Design
tain reso urces to com pliance (Meyer & Rowan,
1977; To lbert & Zuck er, 1996). He nce , a s the por-
tion of competitors in an organization's field or
industry adopting a f lexible benefi t plan—or a
par t icular plan des ign—increases , the s t rength
of the pressures to adopt the plan a l so in-
c rea ses . The p res sure s to adop t shou ld be
greater in the heal th care industry, for example,
where over two-thirds of organizat ions offer
f lexible benefi ts , than in manufacturing, where
the incidence is lower. Similarly, the pressures
to include a f lexible spending account in the
plan should be highest in the services industry,
where the incidence of the accounts is highest .
Thus,
we propose the fol lowing:
Proposition ia; The ra(e of new flexi-
ble-benefit-pian adoptions will be
higher in industries in which the
portion of organizations offering the
plans is high than in industries in
which the portion is low.
Proposition Ib: Organizations imple-
menting a new flexible ben efit plan
are likely to match the plan design
e.g., core plus optional coverage or
mix and match) most comm only used
in their field or industry.
Antecedents of institutional pressures: Coer-
cive forces. Inst i tut ional pressures that are more
coercive in nature may be generated by external
agents who control cr i t ical resources and have
the power to impose preferred structures on an
org an iza tion {DiMaggio & Pow ell, 1983; Scott,
1987;
Tolbert & Zucker, 1996). Ou r m od el sug -
ges ts that unions may exer t such pressures .
Powerful unions that control the supply of labor
should theoret ical ly be able to influence man-
-
8/15/2019 A THEORETICAL EXPLORATION of the Adoption and Design of Benefit Plans
10/21
4
Acadeniy oi Managem ent Review
April
agement 's decisions about benefi ts practices.
Unions tend to view flexible benefit plans with
disfavor, primarily because of the concomitant
reductions in employer benefits that often occur
and because the resultant lack of uniformity in
benefi ts is counter to the unions' egali tarian
philosophy, making contract negotiat ions more
difficult {Employee Benefit Research Institute,
1991; Mulcahy, 1990; Wiatrowski, 1994). The re-
source dependence model suggests , however ,
that the strength of these pressures wil l depend
on the importance of the resources and the ex-
tent to which they
can he
obtained from other
sources (Meznar Nigh, 1995; Pfeffer, 1981; Pfef
fer & Salan cik, 1978). Hence , coercive pre ss ure s
are likely to be strongest in highly unionized
and labor-intensive sectors, where human re-
sources represent cri t ical inputs to production
and the power of unions to withhold or supply
labor is high. Close to half of the workers in the
labor-intensive public sector, for example, are
union members, suggesting high union control
over critical res ourc es (Freem an, 1996). There-
fore, we predict the following:
Proposition
2:
The rate of new flexible-
benefit-plan adoptions w ill be lower
in highly unionized labor-intensive
organizations than in organizations
where the degree o f unionization is
low.
Government agencies also may exert coercive
pressure on organizations to adopt preferred
str uc tur es {DiMaggio & Pow ell, 1983). Restric-
t ions on employee compensation, for example,
can be imposed on organizations that have fed-
eral contracts. We are aware of no such contin-
gencies related to flexible benefits. The govern-
ment, however, has passed iegisiafion over the
pas t 20 yea rs that ha s variously encoura ged or
discouraged adoption of the plans. Prior to 1978
the federal tax code discouraged conventional
flexible benefit plans—that is, plans in which
employees could choose between taxable and
no nta xa ble benefits. The doctrine of construc-
t ive receipt esse ntial ly incre ased the costs of
such plans by requiring that employees' taxable
income be calcu lated as if they had received the
maximum amount of taxable benefi ts available,
rega rdle ss of their actual selections (Beam &
McFadden, 1996). The Revenue Act of 1978 ended
the application of this doctrine to flexible bene-
fit plan s, thus restoring favorable tax treatme nt.
Other laws, a l though not speci f ical ly ad-
dressed to flexible benefi ts, may have had the
effect of pushing organizations to build more
flexibility into their benefit plans. The Health
M ainte nan ce Act of 1973, for instan ce, requ ired
employers to give employees the option of join-
ing a Health Maintenance Organization (HMO),
if locally a va ila ble (Beam & Mc Fadde n, 1996).
More recent ly , leg is la t ion requir ing unpaid
leave for family medical needs and portable
heal th insurance has increased the pressure on
employers to become more flexible. Hence, the
strength of legal pressures to introduce flexibil-
i ty into benefi ts programs seems to be increas-
ing.^
Decisions about the
design
of flexible ben efits
also may be affected by coercive governmental
pres sure s. Concerned a bout the potential loss of
tax revenue s result ing from pretax contributions
to flexible spending accounts, the federal gov-
ernm ent estab lish ed the use it or lose it rule in
1984. The rule had the effect of limiting em-
ployee use of these accounts by requiring that
any money left in the funds at the end of the
enr ollm ent p erio d be forfeited. In 1989 the gov-
ernment enacted legislat ion that further dis-
couraged employers f rom offer ing f lex ib le
spending accounts , requi r ing them to make
available at the beginning of the enrollment
period the full amount of the yearly contribution
election, even if employees had not yet contrib-
uted the full amount to the account.
Changes in leg is la t ive pressures are not nec-
essar i ly related to cha nge s in m anag eme nt ' s
decisions a bout the adoption a nd d esign of f lex-
ible benefit plans. As Tolbert and Zucker {1983)
point out, strong resistanc e ca n lead to noncom-
pliance with unpopular legislat ion (e.g. , man-
dated integration of public schools). Further, the
r e s o u r c e d e p e n d e n c e m o d e l s u g g e s t s t h a t ,
rather than passively conforming to such pres-
sures, organizations wil l at tempt to actively
manage them wherever feasib le and desi rab le
(Oliver, 1991). Ind eed , Sec tion 89 of the Inte rna l
Revenue Code, which created complicated non-
discrimination rules for al l employer benefi t
plans , wa s repe aled just 3 yea rs after i ts pas-
sage, following objections that the rules were
^ Many of the ideas we di&cuse about the effects of gov-
ernmental legislation are based on comments from an anon-
ymous reviewer.
-
8/15/2019 A THEORETICAL EXPLORATION of the Adoption and Design of Benefit Plans
11/21
1998
Barringer
and Milkovich
3 5
too difficult and costly to implement (Employee
Benefit R ese arc h Ins titute , 1991). Evid enc e su g-
ges t s , however , that organizat ions general ly
have been responsive to changes in legislat ion
pertaining to flexible benefits. In 1984—the year
the federal government issued regulations clar-
ifying the terms and restrictions on flexible ben-
efit pl an s set out by section 125 of the In tern al
Revenue Code—new adoptions of the plans in-
cre ase d by 127 perce nt. Based on theory a nd
evidence then, we predict:
Proposifion 3a: The rate o f increase in
new adoptions of flexible plans will
be highest following the introduction
of favorable legislation.
Proposition 3b: The variety of plan de
signs will be responsive to favorable
legislation.
Expected Efficiency Gains
All four theoretical perspectives provide in-
sights regarding the effects of efficiency con-
cerns on decisions about f lexible benefi t plans.
Under the institutional model, efficiency is only
expected to play an important role during the
early, preinst i tut ionalization stag e, wh en the in-
cidence of the plans is low and adoption deci-
s ions dep end on the de gre e to which the
ch an ge improves internal proce ss {Tolbert &
Zucker, 1983: 26). The res our ce de pe nd en ce
model implies that organizations adopt total
compensation systems that wil l ensure the flow
of critica l res ou rc es (Balkin & Ba nnis ter, 1993;
Pfeffer
8i
Da vis-Blake , 1987). The a ge nc y mo del
suggests that organizat ions adopt compensa-
t ion structures that wil l reduce shirking where
productivity is difficult and/or costly to monitor
(Eisenha rdt, 1989). Under the tr ans act ion cost
model, organizations theoretically use compen-
sation systems both to reduce shirking where
productivity is difficult to monitor and to reduce
costly turnover among employees who have re-
ceived firm-specifc training (Williamson, 1981).
As Figure
shows, we posit that expectat ions
about the efficiency gains associated with flex-
ible benefit plans are directly influenced by the
organization's benefits objectives. The institu-
t ional perspective assumes that during the pre-
inst i tut ionalization years of f lexible-benefi t-
p lan adopt ion , when external pressures are
weak, management makes decis ions about the
plans based on i ts expected impact on technical
operations. Hence, organizations wil l be l ikely
to adopt flexible plans during this stage only if
the promised outcomes (enhanced benefi ts sat-
isfaction and cost containment) are (1) important
to the effectiveness of the organization's bene-
fits pla n an d (2) likely to be ac hie ve d. A doption
decisions, therefore, should be determined, at
least in part, by the organization's benefits ob-
jectives. Similarly, the particular type of design
implemented should be logically related to the
achievement of plan objectives. The assumption
under the resource dependence, agency , and
transaction cost perspectives that organization-
al interest and agency play an important role in
determining structures also implies that deci-
sions about flexible plans will be rationally re-
lated to benefits objectives. Predicting decisions
about the plans, therefore, requires information
about organizations' benefi ts objectives.
Although the inst i tut ional model implies that
decisions about f lexible plans during the early
stage will be influenced by benefits objectives,
the model's focus is primarily on explaining en-
vironmental constraints on decisions during the
later stages. We can more readily derive in-
sights into the particular factors that constrain
the setting of benefits objectives from the re-
source dependence, agency , and t ransact ion
cost models. Together, these three perspectives
suggest two sets of factors affecting organiza-
t ions ' ben efits objec tives: {1) the n at ur e of the
work and (2) labor m arket cond itions.
Theoretically, the nature of the work affects
the value of employees and the ease of monitor-
ing their productivity. Under the resource depen-
dence model, attributes of the work affect the
extent to which organizations are dependent on
employees for the acquisition and/or efficient
us e of critic al res ou rce s {Bartol & M artin, 1988).
When resource dependency is high, organiza-
tions will emphasize satisfaction objectives as a
means of at tracting and retaining cri t ical em-
pl oy ee s {Balkin & Ba nn iste r, 1993; Pfeffer &
Davis-Blake, 1987). Bartol and Martin (1988) iden-
tify four work attributes that affect employee
control over c ritical re so urc es: {1) the d eg re e of
uncer tain ty surrounding the achievement of
t asks ,
{2) the im porta nce of task a chie vem ent to
the or ganiz ation (task centrality), {3) the ea se
with which the work can be observed and mea-
sured , and (4) the level of skill spe cializ ation
required to achiev e tasks . Such condit ions m ight
-
8/15/2019 A THEORETICAL EXPLORATION of the Adoption and Design of Benefit Plans
12/21
316
cademy of Managem ent Review
April
be found in the research and development divi-
sion of a high-tech company, where creative ef-
forts related to produ ct deve lopm ent c an be dif-
ficult to monitor, specialized skills required to
perform the work can be difficult to replace, and
the development of innovative products is cen-
tral to the com pa ny 's su cce ss (Bartol & Martin,
1988;
Eisenhardt, 1989).
We propose a fifth factor: the extent to which
the technology is labor intensive versus capital
intensiv e. Wh ere HR inputs rep resent a rela-
tively small part of the production process, op-
era t ions can cont inue even when these inputs
are withdrawn. Accordingly, capital- intensive
organizations (e.g., oil or chemical), although
dependent , are re la t ively less dependent on
workers wi th discre t ionary cont rol over re-
sources than are more labor-intensive organiza-
tions (e.g., service).^
The agency model implies that benefi ts sat is-
fact ion wil l take precedence over cost-contain-
ment object ives when organizat ions face both
high monitoring costs and high outcome uncer-
ta inty . Under these condi t ions , behavior -based
contracts provide l imited incentives for self
interested agents to act on behalf of the princi-
pal ,
and outcome-based contracts inefficient ly
al locate r i sks to r i sk-averse agents . Al terna-
t ively, und er a behavior-based/eff iciency w ag e
approach, compensat ion is t ied not to outcomes
but to continued employm ent, the desirab i l i ty of
which is increased by offering employees pay
and benefits that they value (Nalbantian, 1987).
The organizat ion reduces monitoring costs, be-
ca us e emp loyee s do not wa nt to r isk losing their
jobs (with the valued benefits) and, therefore,
have an incentive not to shirk, even when not
closely m onitored (Calvo, 1987; Sh ep ard et al.,
1996).
Like the resource dep en den ce model , then,
the agency model impl ies that where employee
effort is difficult or costly to monitor, organiza-
tions are likely to em ph asiz e offering bene fits
sys tems that enhance employee sa t i s fact ion.
A key var iable not sugg ested by the resou rce
dependence or other models i s outcome uncer-
ta i nt y^ th at i s , the extent to which outcomes are
af fected by factors beyond employee ef for t
and/or are difficult to measure. To illustrate.
We use industry examples such as these ior the purpose
of illustration only. Empirical tests of our model would re-
quire direct measurement of variables, such as task uncer-
tainty, rather than the use oi proxies, such as industry.
consider consult ing f irms, where professionals
with special ized knowledge may be diff icul t to
monitor and outcomes are affected by factors
beyond the consul tant ' s cont rol . When manage-
ment in such organizat ions decides to imple-
ment flexible benefits, the aim, more likely, is to
enhance employee sa t i s fact ion.
The ease of monitoring productivi ty emerges
as a key work at t r ibute explaining organiza-
t ions ' benefi ts object ives under the t ransact ion
cost model as well. When monitoring is difficult,
the potential for opportunist ic behavior is high.
The assumption is that employees are not apt to
work hard if they believe that lower effort is
unlikely to resul t in any negative consequences.
Incentives for employees to act in the interests
of the organizat ion are, in many cases, provided
by tying the employee's pay to organizat ion or
individual per formance. Kal leberg and Reve,
howev er, arg ue that in an economic sen se, in-
centive s are th e price vector of the contract , an d
include pay, bonuses, and fr inge benefi ts
(1993:
1113).
As wi th the resource dep end enc e and
age ncy models, this implies that the price of
employment—hence, the cos t of los ing i t—
affects em ploy ees ' prope nsi ty to act in the inter-
est of the organizat ion.
A second at tr ibute of work under the t r ans ac-
t ion cost model—one not specif ied by other
models— is the extent to which ski l ls required to
achieve the work are acquired on the job (hu-
man asset specif ici ty) . When employees acquire
critical skills specific to the organization pri-
mari ly on the job, an organizat ion's cost ly in-
vestments in t raining can be lost i f workers quit
before expected productivi ty gains are ful ly re-
al ized. Examples of such organizat ions include
consulting firms, law firms, and financial bro-
kerage f irms, where revenue creat ion is l inked
to bui lding re la t ionsh ips am ong c l ients . In these
ci rcumstances internal governance s t ructures
will be efficient if they stabilize employment.
Benefits that accrue with seniority, for example,
will disc ou rag e q uittin g (W illiamso n, 1981). In-
deed, many f lexible plans include a provision
that the al locat ion of credi ts for pu rch asin g b en-
efi ts wil l increase with seniori ty (Employee
Benefit Research Institute, 1991). Compensation
packages that include pay or benefi ts that ex-
ceed what employees could obta in e l sewhere
also wil l discourage quit t ing. Hence, when cri t -
ical skills are firm specific and/or monitoring
em ployee perform ance is difficult , o rganiza t ions
-
8/15/2019 A THEORETICAL EXPLORATION of the Adoption and Design of Benefit Plans
13/21
1998
Barringer and Milkovich
31 7
m ay try to minimize their transaction costs by
offering total compensation packages that
en-
h a n c e the v a l u e of con t inued employm en t ,
thereby discouraging employees from quit t ing
or shirking.
In
this case benefits objectives will
emphasize employee satisfaction.
abor market conditions
theoretically affect
the extent
to
which
an
organization
is
depen-
dent on external agents for crit ical human re-
sources . As we noted e arlier, unio ns that control
the supply
of
labor
to an
organization
can di-
rectly influence decisions about flexible benefit
p lans .
At the same t ime, nonunionized organi-
zations
in
indust r ies where membersh ip
is
high
might seek to avoid un ion involvement by em-
phasizing employee satisfaction objectives and
reducing workers' felt need
for
collective repre-
sentation. Hence,
the
percent
of
union mem bers
in an organization 's labor market may help ex-
plain benefits objectives. Conditions
in the la-
bor market also determine the ease wi th which
critical skills can be replaced. Replaceabil i ty,
as ind icated
by
such labor market c ondit ions
as
unem ploymen t rates , theoretically affects organ -
izat ional dependence on employees ' resources
and, hence,
the
importance
of
satisfying bene-
fits pr ef er en ce s {Bartol M artin , 1988).
To summarize, an organization 's benefi ts ob-
jectives can be explained , at least in part , by a
set
of
variables describing internal work
at-
t r ibutes and external labor market condit ions.
Where the work is such that the opportunit ies for
sel f - in teres ted
or
opportunis t ic behavior
are
high and/or employee control over critical re-
sources is high, organizations wil l tend to em-
phasize benefits satisfaction over cost control.
Satisfaction also is likely to be the primary ob-
ject ive where union involvement is high and/or
there
is a
shortage
of
critical skills
in the
labor
market . Organizat ions facing relat ively less
pressure from these condit ions are less likely to
be concerned w ith providing
a
valuable benefi ts
p l a n and are more l ikely to focus on cost-
containment objectives. ' '
Obviously, organizations typically claim multiple bene-
fits objectives, which include both employee satisfaction
and cost containment (Beam
McFadden, 1996). Neverthe-
less, survey evidence suggests that organizations prioritize
their objectives
and
easily specify
a
single, primary objec-
tive behind their decisions to adopt such practices as flexi-
ble p lans .
In a 1992
survey
52
percent
oi the
part icipat ing
iirms indicated their primary reason
ior
implementing ilex-
Of course, not all organizat ions whose pri-
mary benefits objective is employee satisfaction
are going
to
adop t flexible ben efits. Evidenc e
suggests that employees ' react ions to the plans
vary , perhaps because some see the enrollment
procedures
as
confusing
and
time consuming
(Kossek, 1989). Nor can organizat ions alw ays ex-
pect to ach ieve c ost-containment objectives by
adopting flexible benefi t plans.
The
costs
of im-
plement ing the plans can be high, possibly out-
weighing potential cost savings. We posit that
the effect
of
benefits objectives
on
decis ions
about flexible plan adoption will be moderated
by current fnonfJexijbieJ
benefit plan costs,
flex-
ible plan implementation
and
adminis t rat ion
costs (pJan cos*s), and employee
preferences.
Organizations whose primary objective
is
cost
control
are
unlikely
to
ado pt flexible bene fits
if
the adminis t rat ive costs of the plans are high
relat ive
to the
expected returns. Small organiza-
t ions,
and/or organizations without established
information systems, are less likely to have the
r esou rces
to
cost-effectively im plem ent
and
manage flexible benefi t plans than are larger
organizations, part icularly in the early years of
adoption, when software packages simplifying
program adminis t rat ion are not yet avai l ab le
(Lawler, 1981). How ever, org an iza tion s w ith gen-
erous benefits, such
as
first-dollar medical
cov-
erage (i.e.,
no
deduc t ib le
or
coinsurance), might
expect to contain the rising costs of benefits by
moving from
a
defined benefit
to a
defined
con-
t r ibution arrangement, as often occurs with the
introduction of flexible benefit plans.
Proposifion 4a: Amon g organizations
whose primary benefits objective is
cost control,
the
propensity
to
adopt
flexible benefit plans will be posi-
tively related to the munificence of
current nonflexible) benefits.
Proposition 4b: Amon g organizations
whose primary benefits objective is
cost control the propensity to adopt
flexible benefit plans will be posi-
tively related
to
organizational
re
ible benefits was health beneiits cost containment, and 28
percent indicated their primary objective was to satisfy di-
verse em ployee n eed s (Employee Benefit Research Institute,
1995). Our
analy sis sugg ests thai
the
primary objective will
be more helpful than secondary objectives in explaining
management's decisions about flexible benefit plans.
-
8/15/2019 A THEORETICAL EXPLORATION of the Adoption and Design of Benefit Plans
14/21
318
Academy of Management Review
April
sources
as indicated by size and cur-
rent information systems).
An organization may expect f lexible plans to
enhance benefi ts sat isfaction when i ts work-
force is highly diverse (in terms of gender, eth-
nici ty, and age). Whether an organization actu-
ally enhances sat isfaction by adopting flexible
benefits is unclear. In a study of employees'
rea ction s to the introduction of a flexible benefit
plan. Barber et al. found no significant relation-
ships between satisfaction with the plan and
diver gen ce from the trad itiona l profile —that
is ,
long-tenure, married male s with children
an d non wo rkin g s po us es (1992: 59, 62). Never-
theless, survey evidence clearly suggests that
employers believe adopting flexible benefi ts
will enhance the benefits satisfaction of a di-
verse workforce (Employee Benefit Research In-
stitu te, 1995; Hew itt Ass oci ate s, 1995). O rga niz a-
tions also may expect flexible benefit plans to
increase the benefi ts sat isfaction of employees
who are relatively well educated if, as Lawler
(1981,
1990) argues, such employees prefer to be
involved in making decisions that affect them. It
may also be that employees in the h igher-
income tax brackets are at tracted to flexible
p lans because of opt ions (such as f lex ib le
spending accounts) that provide a tax shelter for
cash earnings. Hence, we predict:
Proposifion 5:
Amo ng organizations
whose p r imary
bene fits objective is
employee satisfaction, the propen-
sity to adopt a flexible benefit plan
will be positively related to the di-
versity, education, and income level
of the workforce.
The assumption that expectat ions about effi-
ciency gains drive decisions about f lexible ben-
efi ts implies that the plans wil l be designed in
accordance with benefi ts objectives. Thus, we
expect that programs implemented primarily to
meet the diverse benefi ts needs of a heteroge-
neous workforce will offer more flexibility to em-
ployees in selecting their benefits. As we indi-
cate in Table 1, plan des igns tha t provide the
most choices—or flexibility—are the core-plus-
opt ions and mix-and-match p lans . Organiza-
t ions emphasizing employee sat i sfact ion are
more l ikely to implement these plan designs
rather than the modular-options plan, which
limits choices to prepackaged plans, or the sal-
ary-reduction-only plan, which simply offers the
opportunity to pay for predetermined benefits
with pretax dollars. Therefore, we predict the
following:
Proposifion 6:
Organ izations whose
primary benefits objective, at the time
of flexible-benefit-plan adoption, is
employee satisfaction are more likely
to offer the core-plus-options or the
mix-and-match plan than are organi-
zations that empha size cost control.
Organizat ions emphasizing cost -containment
objectives, however, are unlikely to offer a lot of
choices . Ma nagem ent can m inimize adm inis t ra-
tive costs by offering the salary-reduction-only
or modular-options plans, which offer less flex-
ibility and, therefore, are less costly to imple-
ment, commun icate, and m an ag e (Beam & Mc-
Fa dde n, 1996). The se organ izati ons m ight a lso
be less likely to offer flexible spending ac-
counts, because al lowing employees to pay in-
surance premiums and uncovered medical ex-
penses with pretax dollars essential ly reduces
the cost to workers of medical care and, hence,
their incentive to use it carefully. Thus:
Proposition
7: Organizations whose
primary benefits objective, at the time
of flexible-ben efit-plan ado ption, is
cost control are more likely to offer the
modu lar-options or the salary-reduc-
tion-only plan than are organizations
that empha size employee satisfaction.
The Relative Strength of Institutional Pressures
and Expected Efficiency Gains
Although institutio nal an d efficiency per-
spectives offer com plem entary r at ion ales for de-
cisions about flexible benefit plans, these two
factors also may generate confl ict ing pressures
on managers. According to those holding the
inst i tu t ional v iew, organizat ions may of ten
adopt structures that do not improve efficiency
but do conform to preva iling prac tice (Tolbert &
Zucker, 1996). We sug ge st that the rela t ive
strength of the two factors depends on the fol-
lowing three condit ions.
1)
T he
stage of institutionalization
of flexible
practices affects the strength of inst i tut ional
pressures . During the preinst i tu t ional izat ion
stage, when few organizat ions have adopted
-
8/15/2019 A THEORETICAL EXPLORATION of the Adoption and Design of Benefit Plans
15/21
1998
Bairinger
and
Milkovich
319
these p lans , p ressures to adopt and design in
specific ways
are
weak. Hence, decisions
to do
so depend on economic and technical iss ues. As
more organizations adopt, the p ressu res to con-
iorm
to
preva il ing practices beco me stronger.
According
to
this logic,
the
econom ic eificiency
rationales become less important or, maybe, are
a s s u m e d
by
m a n a g e r s .
( If
these leading
com-
p a n i e s are doing it, so should I. )
(2) Organizations may vary in their desire t
resist the pressures . That is, if man agers expec t
flexible benefit plans to generate minimal , or
nega tive, efficiency gain s, they may d ecide they
should try to resist any p ressu res to adopt or
design in a cer tai n w ay (O liver, 1991). W her e the
p l a n s
are too
costly—and
the
organization
is
trying to contain costs—or are u n a p p e a l i n g to
employees—and
the
organization
is
trying
to
en han ce benefi ts objectives—the de sire to resist
is likely to be high.
{3) Or gan iza tions vary
in
their
ability
t
resist
ins t i tu t ional pressures . According to inst i tu-
t ional and resource dep end enc e theorists, differ-
ences
in
ability
to
resist
are
related
to
differ-
e n c e s in o rgan iza t iona l i n t e rco nnec ted ness ,
uncertainty about goals or technology, and or-
ga niz atio na l size (Gree ning & Gra y, 1994).
/nferconnecfedness, or professionalization oi
m a n a g e r i a l staff, is the density oi interorgani-
zat ional re lat ions among occu pants
of an
organ-
iza tio na l field {Oliver, 1991: 171). The idea is
that organizat ions managed pr imari ly by pro-
fessionals,
or
others be longing
to
interorganiza-
t ional groups, wil l be influenced h eav ily by
s tandard-set t ing academic ins t i tu t ions or pro-
fessional networks
and,
therefore, w ill tend
to
adopt the preva il ing HR practice s in their field.
In these ci rcum stances the collective s treng th of
the pressures makes them more difficult to resist
{Oliver, 1991). Interconnectedness is likely to be
observed in industries that have a lot oi busi-
ness ,
t rade,
or
professional organization s (Good-
ste in, 1994; Ing ra m & Sim ons , 1995), su ch as the
service (e.g., cons ulting or he alth care) and high-
technology industries. Professional organiza-
t ions, such as the American Com pensat ion As-
sociat ion or the Society oi Human Resource
Mana gement , tend to empha size leading-edge
pract ices . Benchmarking o ther organizat ions '
best practic es is another example of how in-
terconnectedness
is
manifested
in
practice.
Uncertainty about goals
or
technologies
the-
oret ical ly induces organizat ions
to
imi t a t e
the
prac t i ces of other organizat ions that are per-
ce ived as succe ssful (DiMaggio Powell, 1983;
Oliver, 1991; Zucker, 1987). Or ga niz ati on s in
high- technology indust r ies or hea l th ca re , for
example, o f ten operate in highly uncer tain en-
vironm ents . F inal ly ,
the
s c a l e
and
resour ces of
an o rgan iza t ion , and hence its abi l i ty to res is t
in s t i t u t iona l p ressu res , are re l a t ed to its size
(Green ing & Gray , 1994; Pfeiier & Sa lanc ik ,
1978).
Therefore, we offer the following:
Proposition
8: The
relationship
be-
tween efficiency-related factors ben-
efits objectives, labor market condi-
tions, nature
of the
work, current
bene fits c osts, flexible plan costs, and
employee preferences)
and
manage-
ment s decisions about flexible plans
will be stronger during the preinstitu-
tionalization than the semi- and full-
institutionalization stages.
Proposition 9: The relationship be-
tween institutional pressures and
mana gement s flexible benefit deci-
sions will be stronger when conform-
ity with the pressures (e.g., to adopt
flexible benefits) does
not
conflict
with cost-containment or benefits sat-
isfaction objectives.
Proposition 10: The relationship be-
tween institutional pressures
and
mana gement s flexible benefit deci-
sions will be stronger am ong small or-
ganizations or organizations
in
which
uncertainty or interconnectedness is
high.
IMPLIC TIONS ND CON CLUS IONS
Our purpose in this article has been to ana-
lyze and integrate four theoretical explana-
tions oi why organizations adopt flexible ben-
eiits and why such variety in plan designs
exists. We have generalized the theories into
two primary ioci—institutional pressures and
expected efficiency gains—that influence both
adoption and design decisions. As our inte-
grated model demonstrates, further analysis
of these decisions through the iour theoretic
lenses suggests sets of specific variables that
must be included when studying manage-
-
8/15/2019 A THEORETICAL EXPLORATION of the Adoption and Design of Benefit Plans
16/21
3
Academy of anagement Review
April
ment's flexible benefit decisions. Institutional
pressures are contingent upon competitors'
pressures and such coercive forces as legisla-
tion and unions. The expected eificiency gains
are a function of plan objectives, which are, in
turn, affected by labor market conditions, the
nature of the work, employee preferences, and
costs. The relative strength of institutional
versus efficiency factors is moderated by the
stage of institutionalization, as well as factors
related to the organization's resistance to in-
stitutional pressures.
Application to Other HR Innovations
Generalizing the insights gained from ex-
ploring a specific HR innovation— îlexible
benefits—to questions surrounding decisions
about other innovations remains to be done.
We believe that our analysis oi the iour theo-
ries and related research provides a useiul
framework ior such eiiorts. Further, we submit
that our integrated model oifers insights into
the decisions management makes about other
HR innovations. Our model may have limited
generalizability when it comes to some of the
moderating factors, such as workforce diver-
sity, which may be unique to flexible benefits;
however, even these variables oifer a platform
for future work.
Consider the case oi self-managed work
teams. Our model implies that explanations
for observed patterns oi team implementa-
tions must include an examination oi the in-
stitutional pressures related to teams. Consid-
ering first competitors' practices, we find that
adoptions oi this innovative practice have, in
recent years, increased substantially among
manuiacturing iirms (Banker, Field, Schroe-
der, Sinha, 1996; Cohen, Ledford, Spreitzer,
1996; Osterman, 1994). This trend suggests that
competitors' practices in the manuiacturing
sector will generate strong institutional pres-
sures favoring the adoption of the team ap-
proach. Hence, new team implementations are
likely to be higher in this sector than in other
sectors, where the approach is less prevalent.
At the same time, many unions oppose the
adoption of teams, which they view as under-
mining the role oi unions in representing work-
ers {Kochan, Katz, McKersie, 1994). The Na-
tional Labor Relations Act, which prohibits
organizations irom forming company unions,
has recently been invoked by the National Labor
Relations Board (NLRB) to bar certain types of
teams in nonunion settings {Flynn, 1996). Conse-
quently, in settings that are currently unionized
and/or in settings where unions are attempting
to organize workers, coercive legislative and
union forces generate institutional pressures on
organizations ot to adopt a team approach.
Variability in the strength of these pressures
may help explain adoption patterns over time.
Soon after the NLRB issued its first ruling
against the use of teams, many organizations
backed away irom employee involvement initi-
atives or modified existing teams to be in com-
pliance with the ruling (Flynn, 1996). However, a
bill recently introduced in the
U.S.
Congress pro-
poses loosening the restrictions on teams (the
Teamwork for Employees and Managers Act),
reflecting a current political climate that favors
the use oi innovative approaches to work design
(DeWine, 1997).
Decisions about structures such as teams
will also, according to our model, be inilu-
enced by the efficiency gains organizations
can expect to realize by adopting them. In-
deed, survey evidence indicates that organi-
zations implementing teams do so with the
hope of achieving gains in productivity, qual-
ity, costs, and employee satisfaction {Lawler,
Mohrman, Ledford, 1992). A key determinant
of expected efficiency gains in the case oi
flexible beneiif plans is benefits objectives.
This factor is clearly not relevant to decisions
about teams; however, a closely related fac-
tor—HR objectives—might prove a useful sub-
stitute. Whether an organization's primary ob-
jective in implementing teams is reducing
production costs or enhancing employee sat-
isfaction will be influenced by the nature of
the work and labor market conditions, as pos-
ited in our above discussion of the model. Or-
ganizations depending on employees with
specialized skills that are in short supply in
the labor market, for example, will tend to
emphasize employee satisfaction.
As our integrated model suggests, the impact
oi objectives on organizations' expectations
about eiiiciency gains will depend on moderat-
ing facfors. In the case oi flexible benefits, these
include costs and employee preferences. Em-
ployee preferences ior flexible benefits are the-
oretically related to workiorce diversity and ed-
ucation. Employee preierences will also affect
-
8/15/2019 A THEORETICAL EXPLORATION of the Adoption and Design of Benefit Plans
17/21
1998
aiiinger
nd
Milkovich
321
the capacity of teams to achieve objectives;
however, the literature suggests a different set
oi indicators. Hackman and Oldham (1980), for
example, suggest that a team design will not
lead to performance and satisfaction improve-
ments ii workers do not have a strong growth
need. Lawler (1986) argues that needs for
growth, achievement, competence, and social
interaction are important. Contextual factors
also will aifect the extent to which teams can be
expected to help achieve HR objectives. Specif-
ically, teams may be most successful in contexts
where production tasks are interdependent
and/or in greenfield sites (Campion, Medsker,
Higgs, 1993; Lawler, 1986).
As with flexible benefits, the relative influ-
ence oi institutional pressures versus ex-
pected eificiency gains on management's de-
cisions about teams will depend on the stage
of institutionalization as well as the organiza-
tion's ability and/or desire to resist institu-
tional pressures. Factors related to the eiii-
ciency gains organizations can expect to
achieve by adopting teams will exert more of
an influence during the preinstitutionalization
stage. During the semi- and iull-institutional-
ization stages, organizational uncertainty, in-
terconnectedness, and size will aifect the or-
ganization's ability to resist pressures to
adopt {or not adopt) teams. Finally, the desire
to resist these pressures in the later stages of
institutionalization will depend on whether
the adoption oi teams is consistent with the
organization's objectives. Organizations with
a long tradition of individual-based work have
found that the introduction oi teams can lead
to employee discontent, making the achieve-
ment oi employee satisiaction objectives difii-
cult (Lawler, 1986).
The above discussion suggests that we can
apply many of the factors posited to aiiect deci-
sions about flexible benefit plans to decisions
about other
HR
innovations. The applicability oi
institutional pressures, expected efficiency
gains, labor market conditions, employee prei-
orences, and the nature of the work appears to
gQ beyond the specific case of flexible benefits.
Other factors may vary somewhat across con-
texts. Benefits objectives are only an appropri-
ate factor when one is considering benefits in-
novations. Nonetheless, there are a number oi
such innovations for which this factor is appro-
priate—ior example, work-iamily benefits or
wellness programs. Further, we suggest that a
closely related iactor—HR objectives—can be
substituted easily into the model. Although we
suggest that employee preferences moderate
the effect of objectives on expected efficiency
gains, we also argue that the relevant indicators
oi preierences vary across innovations. Finally,
we suggest that it may be appropriate to con-
sider moderators other than costs and employee
preferences when explaining other types of in-
novative practices (e.g., employees' growth
needs in the case of teams).
Implicat ions or Theory and esearch
The integrated model we propose represents
the first attempt, that we can iind, at synthe-
sizing the implications of these four leading
theories for decisions about organization
structures. As we have noted, others have in-
tegrated two theories (e.g., institutional and
resource dependence, and institutional and
agency), but ours is the first to draw insights
irom all iour. Arguably, integrating four theo-
ries to better understand organizational be-
havior yields a more parsimonious model. Em-
pirical studies oi our model will provide tests
of its efficacy in explaining management de-
cisions about flexible benefits. We have noted
that very little is known about flexible benefit
decisions at the organizational level of analy-
sis.
Our intent is to support organization schol-
ars in the use oi multiple theories in their
study oi employee benefits and, by implica-
tion, other HR innovations.
We should note here that many oi the explan-
atory factors included in our model may be en-
dogenous. For example, the model implies that
workforce diversity is a determinant of the deci-
sion to adopt flexible plans. But it may also be
true that the presence oi flexible plans affects
the diversity of workers who seek employment
at an organization. Similarly, the resource de-
pendence, agency, and transaction cost models
all suggest that inadequate information about
work effort will cause organizations to increase
the value of their total compensation packages.
At the same time, the level of overall compen-
sation may influence employees' willingness to
share iniormation about their work eiiort. Empir-
ically sound tests of the model, therefore, may
require the estimation oi simultaneous equa-
tions.
-
8/15/2019 A THEORETICAL EXPLORATION of the Adoption and Design of Benefit Plans
18/21
Academy
of
Management Review
April
Implications
for ractice
Although our purposes in this article do not
include an applied iocus, we believe that man-
agers may also gain insight irom our model
and analysis. The model clearly delineates
the principal iactors that leading theories
specify influence whether and why types of
flexible plans are adopted. It iocuses manag-
ers'
attention on both institutional reasons
{based on benchmarking, following competi-
tors,
and regulatory pressures), as well as ex-
pected economic gains. Experience suggests
that although the rhetoric around adopting
many HR innovations is expressed in terms of
expected economic gains, the reality may be
that government regulations, as well as fads
and iashions, prevail {Dyer Reeves, 1995).
Our model presents, for the first time and in
one integrated guide, very specific factors
managers could consider when faced with de-
cisions about whether or not to adopt ilexible
plans or what type oi plan design to imple-
ment (Rosenbloom, 1996).
R F R N S
Baikin, D. B., Bannister, B. D .
1993.
Explaining pay iorms for
strategic employee groups in organizations: A resource
dependence perspective . Journal
o/
Occupational
and
Organizational Psychology 66:
139-151.
Banker, R. D., Field. J. M., Schroeder , R. G.,
Sinha, K. K. 1996.
Impact of work team s on manufacturing performance: A
longitudinal field study.
Academy of M anagement
Jour-
na l
39: 867-890.
Barber, A. E., Dunham, R. B., Formisano, R. A. 1992. The
impact of flexible benefits on employee satisfaction: A
field study. Personnel Psychology. 45: 55-75.
Barringer, M. W., 8i Milkovich, G. T. 1996. Employee health
insurance decisions in
a
flexible benefits en vironm ent.
Human Resource Management 35: 293-315.
Barringer, M. W.,
Mitchell, O. S. 1994. Work ers' preferen ces
among company-provided health insurance plans. In-
dustrial and Labor Relations Review 48: 141-152.
Bartol, K. M..
Martin, D. C. 1988. Influen ces on m anager ial
pay allocations: A dependen cy perspective. Personnei
Psychology
41: 361-378.
Beam, B. T., McFadden, J. J. 1996. Employee
benefits.
Chi-
cago: Dearborn Financial Publishing.
Bloom, D. E., Trahan, J. T. 1986. Flexible benefits and
employee choice; Highlights oi the liteTature. New York:
Pergamon Press.
Borleis, M. W. 1996. Cafet eria pla ns
in
operation.
In J. S.
Rosenbloom (Ed.),
The handbook of employee benefits:
505-540. Chicago : Irwin.
Cable , D. M., St Judge, T. A. 1994. Pay preierences and job
search decisions: A person-organization fit perspective.
Personnel Psychology 47: 317-348.
Calvo, G. A. 1987. The economics
of
supervision. In H.
R.
Nalbantian (Ed.), Incentives coopera tion and risk shar-
ing: 3-43. Totowa, NJ: Rowman and Liltlefield.
Cam pion , M. A., Medsker, G. J.,
Higgs, A. C.
1993.
Relations
between work group characteristics and effectiveness:
Implications for desig ning effective work groups. Per-
sonnel Psychology
46: 823-850.
Cohen, S. G., Ledford. G. E., Jr., Spreitzer. G. M. 1996. A
predictive model of self-managing work team effective-
ness . Human Relations 49: 643-676.
Davis-Blake, A., Uzzi, B.
1993.
Determinants of employment
externalization: A study of temporary workers and inde-
pendent contractors. Administrative Science Quarterly,
38: 195-223.
DeWine, M. 1997. Roll Call June 16: 10.
DiMaggio, P. 1988. Interest and agency in institutional the-
ory. In L. G. Zucker (Ed.), Institutional patterns and or-
ganizations: Culture and environment. Cam bridge, MA:
Baiiinger.