Health-care costs are rising while employees consider health benefits a huge factor in where they work. This leaves employers struggling with how to balance it all.
The 2019 Wellness and Wealth Report by Lively found that 40 percent of employees consider healthcare the most important benefit when considering switching employers. The report also revealed that 76 percent of Americans rank health-care among the top three workplace benefits.
This of course makes sense, given that healthcare spending by families with large employer health plans increased two times faster than workers' wages over the last decade, on average, driven in part by rising deductibles. According to the Peterson-Kaiser Health System Tracker, the average family spent $4,706 on premiums and $3,020 on cost-sharing for a combined cost of $7,726 in 2018.
For employers, the biggest challenge of providing health benefits is cost, which also has increased substantially. Average health costs paid on behalf of workers by large employers, in the form of premium contributions for family coverage, increased 51 percent over the last 10 years.
Employers have no choice but to spend time and money to attract, retain and motivate employees. In fact, research shows that employers spend on average 25 to 40 percent above wages/salary for costs related to taxes, paid time off, healthcare, retirement and overhead.
Obviously, employers don’t have unlimited funds, yet they need to attract and retain good employees. Using a total compensation approach may be the answer.
What is Total Compensation?
Total compensation includes wages, of course, but also the value of benefits. This can include health benefits, retirement, and paid time-off programs, disability plans and company cars, all having straightforward monetary value, but also non-monetary “benefits” like remote-work options, gym memberships, discounted on-site daycare, free dry cleaning, etc.
How to Develop a Total Compensation Approach
First, employers should develop a strategic plan that will work across all their benefit programs. The piecemeal approach of cost shifting, freezing and cutting benefits has not worked. Instead, employers should identify key elements that will frame the strategic plan, including:
- Cost containment
- Flexibility in meeting diverse employee needs while preventing administrative nightmares
- Competitive advantages that will increase retention and motivation
Employers also should examine the existing workforce and consider:
- Are appropriate employees in strategic areas that drive profitability?
- What is the age and service of the employee population? (Knowing employee demographics can assist in development/implementation of programs that are highly valued by specific subsets of the workforce, increasing the ability to attract, retain and motivate employees).
- Do we have the talent needed to meet our customers’ current and future expectations?
The next phase is to review each aspect of total compensation:
All too often, compensation review focuses on how pay compares to market practices, when instead it should focus more on performance and future opportunity. To shift toward that wider focus:
- Examine pay grades and alter as needed to better match business models and operations. For example, do employees have an opportunity to increase their base pay with an incentive to differentiate themselves from their colleagues for advancement?
- Replace annual cost-of-living adjustments (COLA) with a focused merit program.
- Review incentive opportunities to ensure they are aligned with objectives.
Employers should consider:
- Establishing a core program that reflects the organization’s commitment to health care that is reasonable and competitive.
- Providing alternate plans that permit employees the choice of buying-up (or trading down).
- Understanding the true drivers of the cost of health care and attempt to address plan design strategies to contain these areas.
Employers should manage retirement plans as if they are separate lines of business, including forecasting and budgeting cash flow, expenses and balance sheet impact. They also should make sure the value of retirement plan participation is clearly communicated to employees.
Ancillary benefit plans offer employees another way to experience job satisfaction, especially during times when incentive compensation or other benefits are reduced or not available. These benefits can include group life insurance, group disability and individual specialized disability.
Paid Time Off (PTO)
Whether an organization uses PTO or vacation/sick days, it is part of the total compensation package. Ensure that whichever is used suits the company culture and determine appropriate guidelines for notification of use and “banking” PTO, as applicable.
Many employees very much value things like remote work options, gym memberships, paid family leave and more when deciding to accept a new job or remain at a current job. Don’t underestimate the importance of everything from professional development opportunities to pet-friendly offices when offering perks—and factor them into total compensation.
Talk to applicants and employees about this total compensation approach and explain the reasoning behind it. To communicate the same message throughout the organization, employers should educate managers and provide appropriate documentation that identifies each benefit offering. With a holistic perspective, employers can better manage costs while offering valuable total compensation packages.
Elliot Dinkin is president and CEO at Cowden Associates, Inc., specializing in helping corporate clients find the best solutions, both for the enterprise and its employees, with regard to compensation, health-care benefits, retirement and pension issues, and Taft-Hartley fund consulting.
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