· 6 min read · Features

Employee Benefits: Return on Investment

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Few companies know what their ROI is from their employee benefits package. Many don't even know which perks are most popular or why. Is this just a management failing?

As HR magazine/Vebnet's employee reward survey has already demonstrated (p4), boosting salary might sound like the easiest option for improving benefits, but it will hardly be the most cost-effective. An organisation employing 1,000 staff (each earning an average of £20,000) will spend an extra £1 million giving a 5% pay rise. For a fraction of this cost, the same organisation could implement an employee benefits scheme and probably get a more engaged workforce to boot.

But herein lies the problem. How is this actually proved? According to Tobin Coles, head of flexible benefits at provider Jelf Group: "A well-run employee benefits plan can reduce an organisation's costs by an average of 20%." So far so good, but even within this he argues it is highly likely good money is being spent on benefits that are not paying their way, and no FD wants to spend money where it is not needed.

In theory, proving to the board that benefits choices are strategic ought not be a problem. A report released late last year by Reed Recruitment found 76% of companies did not offer any health benefits. Unsurprisingly, 88% of staff said they wanted them with 81% thinking that this kind of benefit would make them more productive.

But as HR magazine found last year, in an exclusive poll with YouGov, what staff say they want and what they actually take up when offered them are two different things. Dental cover, traditionally seen to be a benefit that staff want, only gets an 18% take-up despite more than half of companies offering it. Health screening - which often needs to be paid for upfront - had an 8% take-up from the 40% of companies providing it. Reed's operations director, Martin Warnes, says its research is a prime example of why companies should not introduce costly benefits in knee-jerk fashion: "Small and less costly steps towards creating a healthier work environment can be equally effective, such as providing free fruit (see Benefits to Brag About, p18) or encouraging staff to cycle to work."

Perhaps the fickleness of staff is the reason so many heads of reward fail to measure the ROI on what they offer, or remove what isn't wanted. Chris Goulding, head of HR at Luton Borough Council, is not alone when he admits: "We have no hard methods to measure ROI. All we observe is a correlation between staff most familiar with benefits and increased motivation and performance and lower absence."

But is this just an excuse for not managing benefits better? Or is it that measuring benefits this way is not possible?

Paul Sparrow, director of the Centre for Performance-Led HR at Lancaster University Management School, admits benefit management is far from being an easy science: "The technology that comes with a benefits system can quickly tell your usage numbers but it cannot tell you people's motives for choosing particular benefits. "

Part of the problem, says Mark Eaton, director at employee benefits provider The Personal Group, is simply that HR does not know what its employees want. It is in this respect that he recommends HR departments adopt or create a benefits champion to help them make sensible choices. He says: "Employees are like sheep. When companies have a benefits tsar in the workforce, employees will follow their example."

Just as much of a problem, however, is that benefits provision and uptake do not follow normal accounting rules. It seems that take-up, for example, may not actually matter, as long as the company is seen to offer a broad range of benefits, as Judith Inglis, head of benefit consulting at Thomsons Online Benefits, explains: "While not all employees will immediately think they need private medical insurance, it has been proven that just having it does lower staff absence rates, even if it's not used." In a similar vein, staff might choose not to take up a benefit to lower their carbon emissions but it may still be useful to offer the perk because it fits in with corporate social responsibility and the green agenda, attracting recruits to the organisation through this ethos.

Communicating benefits more clearly (something the Vebnet survey found to be lacking) will improve take-up and ROI, but it is in actually analysing take-up that James Markham, MD of benefit management software provider SBC Systems, believes HR must bite the bullet. "It's crazy that large and small companies alike do not know what's going on with 30% of their workforce spend," he says.

According to Markham, "photocopier paper use is better analysed in most offices than benefits". He adds: "The simple fact is that benefits take-up is very easy to report on." HR ought to have the information on which to make decisions: "Benefits are political," he concedes. "Sometimes being seen to have them is just as important - particularly with the likes of childcare vouchers, which get minimal take-up because of the demographics of a company. It's not for us to advise whether low take-up of a benefit means it should be scrapped or communicated more, but at least there is some intelligence to work with."

SBC is able to see which groups of people show better take-up after, say, improved communications, and can calculate a benefits ROI. Last year HR magazine reported how Paul Farley, director of compensation and benefits at Lloyds TSB, knew he had a more than 70% take-up of flexible benefits and it was because health screening take-up was so low (3%-4%), it was dropped. Currently he is in the process of merging Lloyds and HBOS benefits.

Markham concludes: "HR must at least have a benefits strategy, similar to the way sales people have strategies. Just like a salesman strikes a good deal, and makes people think they have a bargain, benefits managers need to sell and monitor the benefits that only cost £500, but to the people getting them, feel like £2,000." HR managers, your challenge has been set.

MIND THE GENERATION GAP

Benefits change with age - yet another reason to consider when reporting on which benefits are most likely to be taken up. Today, most workplaces tend to employ people from across three different generations. According to research by FreshMinds Talent, which questioned more than 1,000 staff:

- Baby boomers (those aged 45 to 64) found the most important work benefit to be a contributory pension scheme. The group that came next were Generation Y (aged 18 to 25) followed by Generation X (those in their 30s and 40s)

- Flexible working seems to span the entire generation gap. This was deemed important across the whole workforce, from Generation Y (68%), to Generation X (70%) and baby boomers (59%)

CASE STUDY: COMPUTERSHARE INVESTOR SERVICES

Computershare Investor Services employs 1,786 members of staff in the UK and offers a variety of perks such as a pension, a share save scheme, death-in-service benefit and salary-sacrifice benefits such as PMI, eyecare vouchers, gym membership and dental insurance as well as a raft of discounts. Pensions achieve the highest take-up at 74%, followed by the share save scheme at 33.5%. A less healthy picture is shown by gym membership (5.4%), critical illness cover (4.6%) and dental cover (3.9%).

Jackie Keefe, head of HR (pictured), explains: "It is important to measure and manage benefits like any part of the business and we regularly review take-up. It shows how successfully we are engaging employees."

Computershare also takes a view of its perks relative to attrition. At exit interviews, staff are asked how far benefits played a part in their decision to leave the organisation. Keefe says: "We can then take a view on whether we need to alter the offering in any way."

But the goal of ensuring employees get the best benefits at the lowest possible cost to the company is what Computershare strives for and Keefe advocates the importance of a strong relationship between HR departments and benefits providers in achieving this.

She explains: "Our provider keeps us up to date with new benefits initiatives and keeps us aware of ways we can modify them to be more cost effective."

COST PER BENEFIT

Based on 1,000 employees, average salary £25,000. Negative costs indicate a financial advantage for employer.

Compiled in partnership with Hewitt Associates

PENSION ...
cost per employee: £2,000
cost for all: £2,000,000
8% employer contribution

... VIA SALARY SACRIFICE
cost per employee: -£160
cost for all: -£160,000
employers' NI saving on 5% employee contribution

LIFE ASSURANCE
cost per employee: £70
cost for all: £70,000
4 x salary

PMI
cost per employee: £450
cost for all: £450,000

HEALTH SCREENING
cost per employee: £350
cost for all: £350,000
range from £100 to £3,000 for detailed screen

EAP
cost per employee: £12
cost for all: £12,000
for a typical support structure

DENTAL INSURANCE
cost per employee: £150
cost for all: £150,000
mid-range cover

HOLIDAY
cost per employee: £480
cost for all: £480,000
five days over statutory minimum at 1/260th salary

CHILDCARE VOUCHERS
cost per employee: -£373
cost for all: -£14,920
employers' NI saving from £243 per month into vouchers

BICYCLES
cost per employee: -£90
cost for all: -£1,800
employers' NI and VAT saving from a £300 cycle

VOLUNTARY BENEFITS
cost per employee: £8
cost for all: £8,000
online packaged voluntary benefit scheme

CHRISTMAS PARTY
cost per employee: £80
cost for all: £80,000
TOTAL: £3,423,280.