The economic downturn has caused many U.S. organizations to review expenses across every aspect of their business — including employee benefits. Not surprisingly, these reviews often lead to drastic cost cutting without adequately forecasting the impact on employee retention and productivity, which ultimately debilitates business goals, especially growth. Combined with labor shortages and stronger competition for critical talent, cost-cutting creates challenges for many HR departments.

Focus on Delivering the Benefits Critical Talent Values

There is a better way — instead of cutting with only limited information, focus on removing only the "wasted" money while potentially improving employees' perceptions of benefit value. This may, at first, appear to be a fantasy. However, leveraging some of the tools our colleagues in marketing have been using for years, we've invented a new way to confidently determine that every single benefit dollar is used to its maximum value potential — as assessed by employees.

When focused only on financial metrics, many companies miss the opportunity to optimize benefit value by shifting dollars from undervalued programs to more valued ones, and improving employee perceptions along the way. How can leading HR organizations provide the best value to employees — especially critical talent — while reducing overall spend? The answer begins with truly understanding the benefit components employees value, and then getting them involved in the process.

Successful companies know the importance of continuously listening to the "voice of the customer." Market research has helped business leaders shape product and marketing strategies by instilling fact-based decision-making processes, rather than relying only on gut feel and intuition. Before critical marketing decisions are made, consumers are engaged, surveys administered and opinions are sought — all leading to and supporting managerial decision making. Market research supports and influences strategic direction.

More recently, a few organizations have taken a more rigorous approach to measuring and optimizing the money they spend on employee benefits. Given the enormity of the expense, HR's decision is arguably of even greater magnitude than marketing's. Many FORTUNE 500 organizations conduct annual or semi-annual employee surveys to measure employee engagement, satisfaction and attitudes. Listening to the "voice of the employee" is important; the linkage between organizations with high levels of engaged employees and subsequent higher performance is well established. Unfortunately, taken in isolation, many of these surveys are ill-suited to help guide the myriad decisions necessary to properly allocate limited total reward dollars to address employee and organizational needs. These surveys usually measure attitudes at a single point in time, and do not identify preferences for specific elements within a given total rewards offering.

A different level of insight is required to optimize employee benefit program value. To provide this level of attention, employers must listen directly to employees, focused exclusively on benefits and/or rewards, on a regular basis to identify value misalignments.

How much money are you wasting on your benefits?

Within any set of benefit offerings, some employees are offered more than they need (increasing costs by providing undervalued offerings), while others are provided less than enough of a particular benefit (a lost opportunity to create value). Optimization is the state where employers get the same or better value in employee attraction, retention, and productivity than they pay in benefit expenses.

Ultimately, when an employee puts a significantly lower value on a particular company benefit or benefit feature, there is a misalignment and a potential for sub-optimal value. One large company undertaking such a study quantified this misalignment at $174 million, or approximately $1,200/employee.

Identifying these value misalignments in one thing, but understanding the root causes is another. One common cause is selecting a particular reward for the employee benefits package based only on competitive practice. Though understanding competitive practice is critical to the "attract and retain" talent equation, it does not necessarily differentiate to create competitive advantage. And, it may not optimally match what the workforce values. For instance, one company saw data suggesting legal assistance was common practice within their industry and would be highly valued. However, after several years of administration, an internal survey and usage data showed clearly that employees valued this benefit least of all those provided — and by a large margin. This benefit just didn't fit the employee population; the money being spent on this benefit was being wasted and could have been spent more effectively by directing those dollars elsewhere.

A second cause for value misalignments is a bit more complex. With the complexity and wide range of benefit choices today, it is hardly surprising that employees fail to understand exactly what their employers are offering (and the value provided) in their benefit packages. At annual enrollment, employees are faced with the task of making many benefit choices from the various savings and retirement vehicles, health care options, and complicated copays and deductibles — choices they may not fully understand and therefore may either over or under-value, which drives misalignment.

Consider the possibilities of optimizing benefit dollars — shifting wasted benefit dollars from undervalued benefit features to valued ones — has to save money while simultaneously increasing employee perceptions of value. At the same organization cited above, hundreds of alternative benefit designs were identified that not only saved millions of dollars annually, but were also preferred over the current program by 85 percent or more of the employee population. This organization identified several options — ways to create greater value to employees, while also saving a significant amount of money — including the opportunity to engage employees in the review and decision-making process.

These value misalignments can be identified by leveraging many of the same tools long used by our colleagues in marketing (such as preference measurement and conjoint analysis). Ultimately, these tools help organizations make better decisions about their benefits — based on evidence and analytics. The lynchpin metric here is actionable employee feedback — quantitative feedback that helps employers find the right balance between employee preferences and cost, creating wins for both parties in the employee value proposition.

What is the alternative?

Without a deep understanding of employee perceptions and preferences related to benefits, decisions will be based solely on financial or efficiency metrics alone. While many organizations understand the direct financial impact of design changes to their benefit programs, these metrics alone do not provide the intelligence required to create an optimal future situation. By failing to deeply understand what employees value from their benefit packages and quantifying that value, it is extremely difficult to design, communicate, and deliver programs that meet their needs without wasting money. Often, the tendency is to make decisions based on the total value (focusing on the most expensive features, such as health and retirement), without understanding how much importance employees place on such features.

Another problem is failing to look at the optimal spending allocation across plans and features instead of optimizing each feature independently. It is difficult to create optimal outcomes by simultaneously optimizing each of the individual features within a reward program. The result is often similar to warm tea — the average of hot and iced teas that statistically meets the preferred option of both hot and iced tea drinkers, but is practically desired by neither. A better approach is to look at how reward dollars can be allocated across reward features and by key segments of the population. This means, for instance, shifting dollars from an undervalued savings plan to a low cost health care plan, instead of trying to create a better health and savings plan that misses the mark on all accounts.

Summary

Increasingly, Human Resource departments are being asked to do the seemingly impossible — spend less while also attracting, engaging, and retaining critical talent. With the current economic situation in the U.S., the pressure to cut benefit costs will intensify. Many firms make these cuts based only on the financial impact of the cost savings, without using this opportunity to understand employee preferences and engage employees in the process. They miss the chance to create optimal packages that blend the needs of the employee and the organization. By leveraging key analytic tools and thinking of employees as customers of benefits, innovative HR groups are able to deeply understand the value employees place on different benefit component elements, and use this information to identify how to focus cost cutting efforts on the elements undervalued by employees, thereby minimizing the potentially negative impact on employee perceptions and, therefore, counter-productive behaviors.

About the Authors

Tim Glowa is in Hewitt's Research and Insight Group. He is based in The Woodlands, Texas, and can be reached by e-mail at tim.glowa@hewitt.com.

Ray Baumruk is in Hewitt's Research and Insight Group. He is based in Lincolnshire, Illinois, and can be reached by e-mail at ray.baumruk@hewitt.com.

Brian Irion is in Hewitt's Research and Insight Group. He is based in Lincolnshire, Illinois, and can be reached by e-mail at brian.irion@hewitt.com.