In an era where data-science-driven knowledge and insight are shaping the way organisations engage with their customers, HR practitioners increasingly embrace such tools to understand their workforce, and to engage them effectively in the provision of employee benefits. However, Gallagher’s recently published Benefits Strategy and Benchmarking Survey reveals that a majority of organisations are finding it difficult to benchmark their benefits provision – let alone obtain insight into their employees’ needs and preferences.
When factoring in holiday provision and employer’s national insurance costs, employers are routinely spending between 30-45 per cent of working time employment expense on benefits provision. The lower end of that estimate remains typical of low margin sectors (e.g. hospitality, retail, support services); the upper end being more the territory of pharmaceutical, oil and gas and financial services firms.
The sheer scale of this expense merits attention in itself. Are business leaders getting value for money? Do their employees understand and appreciate the value of the benefits they are receiving? And – perhaps most pressing of all – is this huge outlay delivering an offering that is competitive?
Changes to benefits should be guided by organisational philosophy
To determine whether the benefits offering is competitive – both in the round and at the level of each benefit programme – it is essential that the employer defines their philosophy, ideally including a reasoned approach to the organisation’s preferred market position. The softer side of philosophy is to consider the messages that the benefits package sends to employees, asking whether they are appropriate and, if not, what needs to be done to re-align them – be that to change the benefits offering or to change the communication.
Furthermore, many organisations – particularly acquisitive ones – tend to accrue a bundle of benefit practices shaped by legacy provision and piecemeal developments, rather than as a result of any clear strategy. As such, certain types and levels of benefits provision tend to “show-up” rather than be deliberately invited.
A crucial precursor of meaningful benchmarking is to define the philosophy – an organisation’s guiding principles – which, in turn, should influence which benefits are provided, as well as the level or quality of each benefit. The best organisations even extend this thinking to a target range of spend on benefits, insulating them from the risk of “benefits creep”: a risky situation in which new or improved benefits continue to be provided without any particular strategic direction, leading over time to an unchecked inflation of overhead expenses.
Different philosophies will of course yield different benefits. If the organisation wishes to emphasise individual responsibility, the benefits offering will typically feature flexible benefits and financial education; alternatively, a more paternalistic or collective philosophy (as is found in the UK public sector) will emphasise commonality and protection against the contingencies of life.
Benchmarking: a matter of strategy or data?
Having established the messages that the overall benefits offering must send, the next step is to benchmark appropriately. Rushing into benchmarking without being clear-headed about benefits’ philosophy and the role of benefits within the total reward mix is often a hazardous exercise. Doing so risks leaving decision-makers with no reliable basis against which to reference their decisions, other than a general market view.
Most intelligent organisations will benchmark their benefits offering against pragmatic considerations: namely, the sector within which they operate, and the types of organisations they expect to recruit from or lose their talent to. By extension, differences in the number and level of benefits tend to cluster by sector, with low margin organisations usually providing fewer and lower quality benefits and – conversely – high margin business providing bigger and better benefits.
Following the above logic, benchmarking analysis should help evaluate the level of total benefits spend, and establish the competitiveness of each benefit against market norms. The former helps the organisation establish an overhead cost structure appropriate to the sector. The latter helps the organisation define gaps in benefit provision against the chosen market position, highlighting shortfalls, overshoots and spaces of provision left vacant by competitors.
Many HR leaders find comparing and communicating the differences of this fine-tuned offering, against the market, often best achieved visually. Implementing a “traffic light” system of indicators can help detail the level of benefit cover relative to market. Such visual aids can be bolstered with accompanying commentary on the nature and extent of the gap.
Most organisations, by definition, will benchmark to the median of their chosen market. If the overriding philosophy is to position benefits as a differentiator, however, it may be that the employer adopts a top quartile position. This thinking is exemplified by much of the UK’s public and third sectors, where the employer perceives – often incorrectly – that their total package is weak compared to the private sector, and thus compensates for the absence of bonus or share plans by enriching their benefits offering. Subsequently, it is not unusual to find a public or third sector organisation offering, for example, 30 days holiday entitlement, compared to a market median of 25 days – or even the SME or hourly paid norm of 20 days. This example illustrates why it is important to include the true cost of holiday in total reward comparisons: doing so ensures that employers do not think of salary as an expense, or of holiday expenditure as something they are not accountable for.
Differentiate to get ahead
The final point to note in benchmarking is that a diversified business might be wise to differentiate its benefits offering by sector, such that different parts of the organisation benchmark against different norms. One example could be a charity with a chain of retail shops. Benefits benchmarking will encourage a wide range of relatively expensive benefits within the core charity, but point to a much less generous offering to achieve competitiveness in the retail arm.
For all the current focus and interest in HR analytics, it remains true that strategy trumps data. Unless the organisation is clear headed on the messages its benefits provision needs to achieve, the barriers to entry it needs to remove, and the appropriate parameters for its benefits spend, no end of benchmarking will provide a satisfactory answer.
Interested in HR analytics? We recommend Mission Critical HR Analytics Summit 2019.