Raising the bar on sustainability of compensation and benefits

In today’s competitive economy, generating revenue, creating sales growth and maintaining a healthy profit margin are challenging but vital objectives. The push to meet these financial goals also comes at a time when the strong labor market is putting upward pressure on wages and benefits. In fact, compensation and benefits represent 30% or more of operating revenue for more than half of employers.¹ Yet, many are stuck in the status quo. 

Making changes to compensation and benefits can be difficult — possibly disrupting and disappointing employees — but there are good reasons why a more strategic approach is the better way to go. When change is thoughtful and incremental, positive outcomes are more likely to prevail for both the workforce and the organization, including a diminished risk of costs growing faster than revenue. By reconfiguring a comprehensive approach to managing rewards, employers can set themselves on a path to long-term sustainability and organizational wellbeing.

Align compensation and benefits with organizational culture, priorities and values

An employer’s HR management philosophy should help determine the right approach to rewards and guide investments accordingly. For example, if compensation and benefits are viewed simply as a cost of doing business, the goal is likely to minimize financial expenditures. However, when they’re considered a tool to attract and retain desired talent, it’s important to understand and prioritize the motivators that will best support this purpose.

Adopt a multi-year planning approach using financial modeling

Nearly two-thirds of employers plan both compensation and benefit strategies annually.¹ This brief time horizon lends itself to reactive, short-term fixes for addressing immediate issues — taking employers off course from longer-term objectives that establish sustainability. A future-focused outlook that includes financial and multi-year labor cost modeling is important for evaluating anticipated growth in one or both of these rewards categories. When that growth is compared to revenue expectations, employers can identify potential threats, areas for incremental or wholesale change, and realistic multi-year goal setting and scenario planning. 

Evaluate employee pay structure

Achieving the right balance between base salary and variable incentive compensation is a critical step toward a sustainable rewards package. Within  the employer’s compensation structure, added flexibility protects against fluctuations in business performance. Employees can be paid more when the business does well, and compensation expenses can be reduced when it underperforms. However, aggressive moves in making pay changes can hurt morale, productivity and retention. So grandfathering existing employees and applying a revised, flexible structure to new hires may be a more palatable solution.

 

Surveying specific employee populations on the types of compensation and rewards that matter most to them helps employers adjust compensation and benefits to meet those needs as much as possible. Once key decisions are made, they should be communicated to the workforce with an emphasis on the most important facets.

Actively manage healthcare costs 

The fact that healthcare accounts for the largest portion of benefit costs was underscored by a recent survey. Results showed that over half of employers experienced health plan increases of 5% or more at their most recent renewal. While nearly three-quarters (74%) consider health benefits cost management a top priority, just 44% agree they have an effective strategy to support that objective.¹ Affordability is a top concern of employees, especially for family coverage, which suggests employers should refrain from simply shifting costs in this tight labor market. When healthcare isn’t affordable, the expense becomes a barrier to treatment — a key factor in keeping employees healthy and working.

An effective tactic for controlling administrative expenses — more widely used by employers rated as best in class — is offering just one or two health plans.²,³ While this approach may limit employee choice, it allows more focused plan management. Telemedicine is also gaining significant traction by providing convenience for employees, on top of cost savings for both employees and employers.¹

Other health management solutions available for employees’ use include cost-transparency tools to enable more cost-effective decisions and disease management programs to help control chronic conditions. Value-based medical tactics, such as offering designated centers of excellence for specified procedures, also target the objective of providing quality services more affordably. For some employers, alternative approaches like defined contribution or private exchanges can make healthcare expenses more predictable and lower the administration burden.

Enable retirement readiness

The risk of delayed retirement is an expensive proposition for employers, usually stemming from the higher costs of more tenured workers, including compensation, healthcare, workers’ compensation claims and even presenteeism. Yet, just 43% actually measure retirement readiness.¹ Once employers take this step, they can use the insights gained to more effectively promote timely retirement through financial advisor sessions and financial literacy education. These opportunities help employees help themselves by acquiring retirement planning and saving skills important to boosting financial wellbeing.

Most employers directly assist their employees with savings by matching employee retirement contributions. Some also use auto-enrollment, auto-escalation of plan contributions, or both — making it easier for employees to channel more income into savings.

To fulfill its purpose as a critical competitive driver of business success, the total rewards package needs to secure the right talent from hiring to on-time retirement. Building a plan to evaluate, benchmark, improve and monitor compensation and benefits — and refine them over time — will ensure a sustainable balance that’s an affordable investment in a profitable future.

This article is an excerpt from our 2019 Organizational Wellbeing & Talent Insights Report – U.S. Edition.

Contributor:
Kent Lonsdale 
Regional President, Northeast Region

Kent is responsible for keeping Gallagher’s benefit services and capabilities current, and helps consultants secure the right resources and expertise for addressing specific client needs. He also serves as the executive sponsor of the retirement and pharmacy consulting practices, and shared services for actuarial, analytics and underwriting.

Endnotes:
¹Arthur J. Gallagher & Co., “2018 Benefits Strategy & Benchmarking Survey,” November 2018
²Arthur J. Gallagher & Co., “Best-in-Class Benchmarking Analysis for Midsize Employers,” April 2019
³Arthur J. Gallagher & Co., “Best-in-Class Benchmarking Analysis for Large Employers,” April 2019