Providing benefits can be costly and a challenge for employers to administer. Often the payback is less than satisfying, as employees typically underestimate the value of their benefits, and see them as peripheral to their reward package. So, it makes good business sense for companies to periodically review their benefits strategy and how it’s delivered, to ensure that they get the optimum return on their investment. And, at a time when employers are having to examine their cost base, the need to secure the best value for money is more important than ever. David Wreford, European Partner, Mercer Human Resource Consulting, offers guidance.
Why provide employee benefits?
There are many reasons for this. Though legislation dictates the minimum that companies must provide, few offer the statutory minimum. This is because the benefits package is an important tool in recruiting and retaining employees, and for staying ahead of the competition.
Benefits can also be used to highlight a company’s principles and enhance its organisational philosophy. By providing lifestyle benefits such as crèche facilities, flexible working and sabbatical leave, employers can convey the message that they support work-life balance for their staff. This can be powerful communication when research shows that work-life balance is becoming increasingly high on employees’ agendas.
More and more companies are therefore moving away from offering the standard benefits to a broader range of options. This has led to growth in other benefits such as travel insurance, personal computers, subsidised gym membership and valet services.
Of course, benefits can also be used to support business requirements – for example, supplying employees with company cars provides greater mobility at work.
Reviewing the reasons for providing benefits is useful, as it forces companies to question their organisational priorities and whether these have changed. Once determined, companies can then assess whether their benefits package is delivering as they hoped it would.
Getting the communication right
Employers should communicate the values and behaviours they want to promote and the way benefit entitlements are determined and increased. A company that maintains it is reducing the importance of status and hierarchy within its organisation is unlikely to be taken seriously if, for example, holiday entitlement continues to be based on grade.
It’s also important that staff appreciate the worth of the packages they receive. Mercer’s research shows that employees underestimate the true value of their benefits by around 20%. However, this lack of understanding can be rectified through better communication and targeted benefit promotion.
Personalised total reward statements are an effective way of increasing employee awareness as they demonstrate the value of all benefits. Most employees understand the value of benefits only through piecemeal communication, such as pension statements and P11ds. Total reward statements clearly illustrate the monetary value of each element of the package and, in many cases, alert employees to benefits they didn’t even know they were getting.
Introducing flexible benefit packages
Another way to increase employee awareness of what’s on offer is to give them a choice. Asking staff to tailor their own individual package focuses their attention on the value of each benefit to them, which then leads to greater awareness of each cost element. This approach has led to an increasing trend towards flexible benefit packages, or ‘Flex’, which require employees to consider the relative value and cost of their packages annually. Flex typically addresses the benefit issue in a personalised manner, and therefore works well with total reward statements.
No benefits strategy can deliver value to a business if the associated costs spiral out of control. Cost control can simply mean establishing terms around the provision of certain benefits in order to control the risks. An example would be to impose a charge for small private medical claims. It could also mean asking a broker to conduct a full market review of benefit providers every two or three years so that the company can ensure it is getting the best possible rate.
Cost is another reason why, increasingly, organisations are choosing to implement flexible benefit packages. Depending on the basis of the credit and pricing arrangements, companies can pass some of the benefit risks to their employees. And, as employers do not have control over the inflation of benefit costs, by converting benefit provision into a defined allowance employers can manage expenditure accordingly. Flexible benefits can be especially useful in controlling costs after a merger or acquisition. They can provide a framework in which all employees have access to all benefits, but if they want additional benefits they must give up some of their current entitlements.
Objectives of a flexible benefits plan
Flexible benefit packages (Flex) can be a powerful means of achieving a wide range of strategic HR goals. In proceeding with a Flex plan, organisations need to be able to prove that the costs involved are a good investment, and justified by the results that will be achieved. Therefore, Flex projects should establish the objectives of the plan and determine how success will be measured.
Typical objectives of a Flex plan are to:
- control costs
- attract and retain employees
- promote a company’s principles and encourage desired behaviour
- align benefits to the business/HR strategy
- raise employee awareness of benefit cost/value
- facilitate benefit harmonisation, for example as part of a merger.
The priority of these objectives will vary significantly from one organisation to another, depending on factors such as size and location. However, every organisation undertaking a move to Flex will be aiming to get the best possible value from its benefit spend.
Typical benefits considered for Flex packages include:
- basic salary
- retirement benefits
- life assurance
- healthcare benefits
- disability benefits
- personal insurance options
- company car
- stock plans
- childcare support
- annual leave
- employee loans
- IT equipment.
Have you considered voluntary benefits?
A well-designed scheme might also allow employees access to an additional range of benefits that they can pay for through their monthly pay package – augmenting the benefits on offer without increasing the company’s cost base. Such ‘voluntary benefits’ might include the ability to purchase household or car insurance at a reduced price negotiated by the employer. Often, the company’s role here is none other than to facilitate the introduction of staff to outside providers, therefore making voluntary benefits a low hassle, cost-effective component of the benefits package.
Review the competition
The more a company knows about what its competitors are offering, the better it will be able to aim for the market position set out in its benefits strategy. Providing a far richer benefits package relative to the competition can be as detrimental to a company as the excess employee turnover resulting from a comparatively poor package. The best way for a firm to increase the accuracy of its market data is to extend its sources of information by, for example, using proprietary benefit surveys, entry and exit interviews and reviewing benefit periodicals.
To yield maximum value for employers, a benefits strategy must take account of a number of factors, including business needs, company culture, employee awareness, cost and competition. By tailoring packages, employees receive the individual treatment and flexibility they want, and companies stand a chance of getting a better return on their investment. However, it is crucial that the strategy is revisited on a regular basis to ensure that it reflects the changing priorities of the firm and its employees.