EMPLOYEE BENEFITS
Businesses giving more choice and flexibility
The modern benefits package is becoming more varied and is now better designed to meet employee needs, their lifestyle and stage of life. Gone are the days of organisations introducing a straightforward, standard package of benefits with no choice for employees. These findings emerged from a seminar on employee benefits held in central London last month, organised by Hawksmere in association with e-reward.co.uk.
The clear message to emerge from the presentations to our audience of HR and reward managers was that companies are expecting their employees to take more responsibility for deciding what they want from their benefits package — including company cars, pensions and private medical insurance.
According to the distinguished panel of experts brought together by Hawksmere and e-reward.co.uk, organisations are — albeit tentatively — seeking to move away from a status-driven culture. Whilst it continues to be true that executives and senior managers are more likely to be provided with flexible benefits, in those organisations planning to increase flexibility, more and more non-managerial employees — not simply the higher echelons — will soon be offered choice in the level of cover of individual benefits.
The consensus amongst the consultants speaking at the event was that a desire to elicit higher levels of employee awareness, understanding and appreciation was prompting companies to adopt a much more complex, flexible structure of benefits. Companies are now offering a wider selection of benefits to more of their employees, including elements such as critical illness insurance, disability and life insurance, dental insurance and financial advice — and they are introducing a more flexible approach to delivery.
In the first of three presentations from management consultants focussing on some of the new ideas at the top of the benefits agenda, Tammy Mattson, head of benefit strategy practice at Towers Perrin, told delegates that the degree of change in benefits programmes has been nothing short of spectacular in recent years. She cited the findings of a recent international study by Towers Perrin which found that six in ten of the 460 companies surveyed have made significant changes to benefits provision in the last three years, with the emphasis on greater flexibility and choice .
In addition, three-quarters of study participants are planning future changes, with more than half looking to introduce flexible, cafeteria-style programmes.
Change in priorities . . .
Drawing on the findings of a separate survey conducted by Towers Perrin in 1998, this one based on the views of human resource professionals in 273 companies, Mattson told delegates that there has been something of an about-face in employers' perceptions of their key benefit priorities.
Recruiting and retaining staff is now the most significant priority in managing benefits, followed by controlling benefit costs. Looking ahead, however, there will be less emphasis on keeping a lid on costs (see document extract below). The main aim in coming years will be to gain maximum value from the spend on benefits.
This finding is in sharp contrast to the results of previous biennial surveys in the series, which dates back to 1992, where controlling costs was always the top current and future priority.
. . . and change in philosophy
For Mattson, many organisations are now aware that the current messages from their benefits programmes do not support their top business and people issues. Rather than employers adopting a paternal attitude by insisting that certain benefits are an essential part of the package and require a minimum level of benefit, as is the case with pensions, life assurance and disability, she reckons that the modern benefit programme will be:
more flexible
performance-related
reflect individuals’ own tolerance of risk and their own choices
managed in an integrated way with other components of total reward.
Effectiveness of current arrangements
One sobering finding to emerge from the international research carried out by Towers Perrin is that both managers and employers agree that benefits do not play an important role in persuading an individual to come to work for their organisation and stay.
So what do employees want? According to Mattson they really value benefits that help them take care of their family and dependants. Statistics gathered by Towers Perrin showed that two-thirds of employees said that these non-traditional benefits were important, but less than a third believed that existing packages meet this need. But above all, employees — more than nine in 10 of those polled — said developing new skills and knowledge is important to them.
Mattson urged employers to look at benefits in terms of the broader picture of what we offer people and consider benefits much more holistically . For benefit programmes to be most effective, it is vital that organisations take a much more holistic approach, integrating them with other business and human resource strategies. They should not be considered in isolation from other elements of total reward such as pay, learning and development and the work environment, Mattson said.
The benefits mismatch
Helen Freeman, principal of the benefits strategy at Towers Perrin, speaking at a separate session of the seminar, examined how employers can obtain maximum spend from their colossal investment in benefits. One of the most startling findings to emerge from the Towers Perrin research in the area is that businesses may be pouring millions of pounds down the drain on benefits that do not add value to the organisation. What’ s more, employees do not fully understand or appreciate the true value of these benefits.
According to Freeman, as many as two-thirds of employees reckon that the cost of providing their benefits amounts to less than 20% of pay, when a more realistic figure would be 30% to 40% of pay.
This mismatch begs the question: how can organisations respond to such a formidable challenge? Freeman offered two solutions to the benefits dilemma.
Firstly, employers need to review and communicate benefits more effectively so as to ensure that they obtain maximum value from their spend. Different communication methods can be used, depending on the degree of change taking place. For example, simple emails may be best if the changes are merely incremental, but when benefit programmes are fundamentally transformed, Freeman recommended that one-to-one communications, led by senior people in the business, might be more appropriate.
Whatever the form of communication used, the vital first step is to research what employee currently think about employee benefits. Then, explained Freeman, it’ s time to devise s communication strategy, develop the material and deliver it.
The second solution is to actively manage costs . There is no simple recipe for success here, but there are steps you can take to ensure greater value from your spend, said Freeman.
To deliver benefits in a way which ensures greater value for money, programmes should:
be managed in an integrated way with other parts of the reward programme
provide messages consistent with your people and reward strategies
be delivered in a financially-efficient manner
meet diverse employee needs, and change as those needs change
be tailored to the particular needs of a business unit
be communicated and administered effectively.
The main lesson Freeman has derived from her research and consultancy work is that you need to be clear about what employees want and value. So, it is imperative that you conduct some employee research.
Trends in benefit provision
Freeman identified two main trends in benefits provision: businesses are giving employees a wider choice of benefits, and they are introducing a more flexible approach to provision. It is clear that benefit programmes have begun to change over the last six years, both in terms of the breadth of benefits available to employees and the way that benefits are delivered, Freeman said. Companies want to encourage greater personal responsibility and enhance employee appreciation of the benefits on offer.
According to Freeman, there are five main types of benefits programme:
A traditional benefits programme with no choice between benefits is still the most extensive form of compensation package in the UK, but companies are now seeking to widen the choice over benefit provision.
Voluntary programmes are the most favoured approach for those companies that are beginning to introduce more choice into their benefits. Under this sort of arrangement, in addition to the core package employers purchase benefits directly from suppliers at preferential rates using their bulk purchasing power. In Freeman’ s view, voluntary benefits can add significantly to employees’ appreciation of the value of benefits at minimal cost.
Benefit flexibility is the next most common design. Here, employees are given the opportunity to choose the level of cover of individual benefits such as cars, pensions and healthcare.
More formal flex schemes — where employees are given the freedom to trade benefits that are part of a cafeteria-style menu of options — remain far from universal, but they are the most popular next step for employers who already offer choice within individual benefits and now wish to allow their employees to trade between benefits they receive.
A small number of organisations have adopted a clean cash package which relies on a basic salary combined with a range of discounted products or benefits that employees can purchase if they so wish. But clearly this radical approach is unlikely to prove attractive for many employers.
Flexible benefits
For Freeman, flexible benefits may offer some important advantages and can certainly help to support business strategy. Companies can obtain real business benefits as a result of making their benefits package more flexible, she told delegates. For example, benefit flexibility can support cost control as companies can decide how much money to allocate to employee benefits and then allow employees to decide how they want to allocate the money to meet their needs. In addition, benefits flexibility, when managed with other elements of reward, can assist in the recruitment and retention of staff.
Her research suggests that organisations with flexible benefit schemes report a variety of advantages, including:
facilitates organisational change — particularly in mergers and acquisitions
builds a culture of increased employee responsibility
enhances future cost management and effectively redistributes benefit spend to more appreciated elements
supports diverse employee needs
integrates pay and benefits to enhance value.
Flex set to take off
Drawing on extensive research in the area, as well as practical experience of introducing flex in her own organisation and in many others in the UK, Carol Woodley, a partner at Arthur Andersen, explored flexible benefits in more depth in a separate session at the seminar. Woodley predicted that, after years of hot air , a combination of advances in technology and the development of systems to deal with the administration mean the growth of formal flex schemes finally looks set to take off.
From the tranche of data gathered by Arthur Andersen, Woodley reckoned it was possible to discern three main reasons why organisations introduce flex. As Woodley pointed out, an important point to note here is that few employers cite cost containment and control as a reason for introducing flex. Invariably, companies are seeking to:
recognise employees’ changing needs
maximise the perceived value of benefits offered
be seen as a leading edge employer.
More often than not, one of the main explanations why UK companies have been all too reluctant to allow staff to swap between benefits is because they remain uneasy about the perceived administrative complexity involved in launching a scheme. But the Arthur Andersen research led by Woodley suggests that administrative complexity appears to have been less of a problem for organisations which have implemented flex more recently. For many organisations, communicating the scheme was often a much bigger problem than had been anticipated.
The results of Arthur Andersen’ s research also tell us something very important about how companies are introducing flex:
Which benefits? Any of the traditional elements of the benefits package can be provided through flex. But the most popular ones are typically holidays, medical insurance, life insurance, dental insurance, childcare vouchers and cars. Newer schemes are more likely to include pensions.
Future prospects? Woodley expects a whole host of other benefits to be included as part of flex programmes in coming years — everything from extended leave to home-office equipment, working hours via office space to travel expenses.
What about communication? If flex programmes are to achieve their objectives, it is imperative to have some form of face-to-face communications exercise such as presentations and focus groups. Flex needs to be handled with care and detail when it is communicated so people feel comfortable with it, said Woodley.
And administration? Around a third of schemes use a system developed in-house to administer their schemes, while a similar proportion use a system purchased externally.
Costs of running flex
From the data gathered in Arthur Andersen’ s 1998 survey, Woodley has calculated the approximate cost of operating a flex scheme, broken down into one-off implementation and system costs and ongoing administration:
implementation: £34,000
systems: £14,000
ongoing administration: £20,000 a year.
Those that invested a considerable amount of time, energy and money in the initial set up of their schemes and in their systems were rewarded in the longer term through reduced administration costs. Woodley said: Sophisticated systems tend to result in lower ongoing administration costs.
Avoiding the pitfalls
If you decide that flexible benefits is right for your organisation, how then can you avoid the main stumbling blocks? Woodley recommended that you keep in mind some of these guiding principles:
Timing: nine months should prove adequate to implement a scheme.
Pilot scheme: test how flex is received — among, say, managers, or in a particular division or plant — and establish the issues likely to arise.
Project management: appoint a dedicated project manager charged with delivering the whole plan and set up a project team with representatives from pensions, tax, finance and HR.
Problems: identify the primary barriers to the successful introduction of the scheme.
Administration: complex and costly administration is without doubt one of the most intimidating aspects for those about to embark on a flex scheme. An array of options are available, so you need to consider which systems to use, whether administration is to be outsourced, and what the systems will do. This is the key area to get right, said Woodley.
Communicate: more communications leads to improved employee perceptions. Interactive, computer-based communications cuts down administration and sells benefits better, said Woodley.
Legal issues: you need the right tax, national insurance and legal advice to ensure that cost savings and control are obtained.
DOCUMENT EXTRACT
Top 10 future benefit priorities
As part of a 273-company survey Towers Perrin asked respondents to rank in order of importance what their main benefit priorities are likely to be in three to five year’ s time.
1. Communicating benefits as part of the total reward package
2. Improving employees' appreciation of benefits provided
3. Managing employees' awareness and understanding of benefits
4. Improving alignment of the benefit package and the evolving workforce
5. Recruiting and retaining staff
6. Improving the match between the benefit package and corporate objectives/business plans
7. Controlling benefit costs
8. Reducing benefit administration costs
9. Easing organisational change
10. Reducing benefit costs in general
Source: Towers Perrin, The benefits package for the future.
Want to know more?
Further reading: if you want to explore this area in more detail, here’ s a selection of research studies we think you might find valuable:
Benefit effectiveness index By Towers Perrin, November 1998, 40pp.
An employee-based survey, drawing on opinion polls conducted in 18 large UK companies across a range of sectors. It provides a valuable insight into the perceptions of both managers (sample size: 1,007) and staff (12,000) towards the effectiveness of benefit provision in the UK.
Availability: Towers Perrin, tel: 0171 379 4000.
Euro rewards 2000: reward challenges and changes — survey results By Towers Perrin, November 1999, 46pp.
The report on reward practices and trends is based on a survey of 460 organisations from 13 European countries. Participants were spread across the full range of sizes and sectors, and just over a third of the participants were UK-based.
Availability: Towers Perrin, tel: 0171 379 4000.
Flexible benefits — counting the costs By Arthur Andersen, October 1998, 30pp.
A survey of flexible benefits undertaken in September 1998, drawing on the views of 167 companies spread across the UK economy. The research examines the experience of flex veterans, focusing on the financial and administrative impact — just over one in 10 of the sample (20 organisations) had already introduced a cafeteria-style scheme — and looks at the views of those organisations seriously considering flex.
Availability: Sue Coleman, Arthur Andersen, tel: 0171 438 5981.
The benefits package for the future By Towers Perrin, October 1998, 27pp.
The fourth in a series of reports, dating back to 1992, examines employers’ views on flexible benefits, as well as the key trends in benefits practices and philosophies. The survey covers over 15 key industrial sectors with 273 HR professionals completing the questionnaire.
Availability: Towers Perrin, tel: 0171 379 4000.
Web links
Arthur Andersen: www.arthurandersen.com/uk
Towers Perrin: www.towers.com