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Why Benefits Matter and How to Maximize the ROI

Do benefits matter? The simple answer is, "yes" - but not necessarily in the manner in which employers traditionally think.

Sibson Consulting's latest Rewards of Work^SM Study examined the role of benefits and benefit satisfaction in the development of turnover intentions and employee productivity. The study, in which more than 1,200 employed Americans participated in 2006, found that of the five Rewards of Work (ROW) that Sibson has identified, and which are illustrated below, the primary factors that drive turnover and productivity are affiliation and work content, which measure employee perceptions and attitudes about their organization and their job — not benefits. However, the study also found that benefits can influence turnover and productivity indirectly, by having a positive effect on affiliation. These findings are discussed in the third report of the study results.

Affiliation is likely not the only indirect channel through which benefits influence turnover and productivity. For example, certain wellness investments may increase the health of employees and, therefore, their productivity. Exploring this hypothesis requires access to employers' data on health investments and productivity outcomes over a period of time. The ROW Study, which captured information from individuals rather than employers, is not geared towards this type of study.

This article examines data from the ROW Study to explore strategies for improving benefit satisfaction. It also addresses factors employers should consider before selecting a strategy.

Improving Benefit Satisfaction: Three Drivers

The ROW Study data suggests that investments (including communications) in the following benefits are most likely to improve overall benefit satisfaction: health benefits, retirement benefits and time-off benefits.

Satisfaction with health benefits is the number one driver of benefit satisfaction. The table below presents an analysis of data from the study that supports this assertion.

It is important to note that although satisfaction with time-off benefits has held steady at a high rate since the 2003 ROW Study was conducted, satisfaction with health and retirement benefits has declined significantly. See Table 2. (In fact, satisfaction with health benefits has declined since 2000.) The estimated impact of increasing satisfaction with health and retirement benefits shown in Table 1 is likely a function of the decline in satisfaction with those benefits in recent years.

Health Benefits Satisfaction

The top three drivers of health benefit satisfaction are (in order of importance):

• The number of different benefits an employer offers and the degree to which those benefits meet individuals' needs,
  
  
• Satisfaction with the health benefits administrative process and rules, and
  
  
• Satisfaction with what individuals pay for their benefits. (This amount is dominated by the out-of-pocket cost of health care coverage.)

Although satisfaction with the health vendor the employer uses is not one of the top three drivers of health benefit satisfaction, the ROW Study confirms that it is important. The study found that vendor satisfaction has a positive and statistically significant impact on health benefits satisfaction.

The quality of the health care tools and information offered by the employer was generally not an important determinant of health plan satisfaction, according to the ROW Study. The exception was for the approximately 16 percent of the study sample enrolled in a consumer-driven health plan (CDHP). Not surprisingly, for respondents in that group, the quality of tools and information were among the top three drivers of health benefit satisfaction.

Retirement Benefits Satisfaction

The top three drivers of satisfaction with retirement benefits, which includes retiree medical benefits, are (in order of importance):

• Satisfaction with the retirement savings plan,
  
  
• The ability of retirement benefits to meet individuals' retirement needs, and
  
  
• The quality of the company's benefits communications.

The ROW Study also found a general concern on the part of respondents about the overall level of their retirement savings. Of all of the variables affecting satisfaction with retirement benefits, the ability of the plan to meet an employee's retirement needs is the lowest in the sample: Fewer than 10 percent of respondents agree that it will, and almost 60 percent are either neutral or think the plan will not meet their needs. Not surprisingly, the data also shows that this concern becomes more acute as employees age.

Participation in a defined benefit (DB) plan tended to increase the level of satisfaction with the company's retirement benefits, but, generally, the impact is not statistically significant. (Almost 30 percent of the respondents participate in a DB plan.) However, for employees over age 45, the impact is greater and slightly positive (i.e., the presence of a DB benefit increases retirement plan satisfaction by about 1 percent). This result is clearly in line with expectations: employees closer to retirement place a greater value on DB plans.

The confidence employees have in the ability of their retirement plan to meet their needs is driven by what plans are offered. Employees who are in a DB plan are about 20 percent more confident than those who only participate in a defined contribution (DC) plan. Employees in both a DB plan and a retiree medical plan are 30 percent more confident. It is through this channel that the particular plan offered can impact overall retirement benefit satisfaction.

Overall retirement benefit satisfaction is highest among respondents who participate in both a DB and a DC plan. Respondents who only participate in a DC plan, have satisfaction rates with retirement benefits that are 16 percent lower on average.

The ROW Study did not find a positive relationship between the degree of satisfaction with the vendors used to administer the retirement plans and the overall satisfaction with the organization's retirement benefits. Because 76 percent of the respondents participate in a DC plan, most likely a §401(k) plan, this result is likely based on respondents' assessment of their employers' §401(k) plan vendor. It could mean that the vendor does not matter, or it could indicate that the differences among vendors are not well understood by plan participants.

Developing a Strategy for Improving Benefits Satisfaction

When trying to determine which improvements and/or changes to the rewards of work are likely to have the greatest positive impact on productivity and retention, employers should:

• Perform an Employee Segmentation Analysis The demographic profile of their workforce is an important aspect of the reward design process. For example, in a young population, enhancing the career element of ROW is likely to have a greater impact on affiliation than would benefit enhancements. For employees age 45 and older, benefits are somewhat more important than career.
  
  
• Inventory Rewards Develop an inventory of your current reward programs. In our experience, this process tends to generate a wealth of ideas about how to better communicate what is currently offered and highlight areas of the Rewards of Work that need to be strengthened.
  
  
• Ask Employees about their Satisfaction with their Benefits Whether a survey is conducted or employees are polled informally, periodically checking in with them about their coverage can help pinpoint areas for improvement. Part of this process should examine whether satisfaction is based upon an accurate perception of the plans.
  
  
• Quantify the Cost of Turnover Analysis of the ROW Study data yielded the following equation: an investment designed to increase benefit satisfaction levels by 10 percent would reduce the likelihood of turnover (all else being equal) by about 5 percent.¹ Understanding an organization's own cost of turnover will help clarify whether an investment like this makes sense.
  
  
• Estimate the ROI Associated with Various Improvements Of course, not all benefits changes are created equal. Organizations need to understand what kind of changes in their particular program will produce the desired results. The study presents results for the average respondent to the survey. It is critical to understand how your workforce might differ and what that may mean about how employees would respond to different changes and improvements.

The next sections discuss options for improving satisfaction with health and retirement benefits.

Options for Improving Satisfaction with Health Benefits

The ROW Study findings suggest that the following strategies may improve satisfaction with health benefits:

• Offer or Expand Coverage Options Breadth of choice matters to employees. This is an important point for employers to consider, particularly if they intend to introduce consumer-driven designs. In particular, if your intention is to replace your current health plan with a CDHP, be sure to continue to offer a range of choices that allows employees to buy more or less coverage to meet their particular needs. This can be done under a consumer-driven umbrella as easily as it can be under traditional preferred provider organizations (PPOs), point-of-service (POS) plans and health maintenance organizations (HMOs).
  
  
• Introduce or Emphasize Flexible Benefits Giving employees the ability to "trade" benefits and/or choose between benefits and cash will give your program the flexibility to meet the needs of a diverse workforce. This is not a new idea. Popularity of flexible benefit plans has ebbed and flowed over the years. It is clear from the ROW Study that there is an advantage to building flexibility into your program.
  
  
• Enhance Self-Service Features Because satisfaction with the health benefits administrative process and rules can affect employees' satisfaction with their health benefits, employers may want to make it easier for employees to gather information. In the complex health care environment in the US, simplification is critical. Many large employers work with a number of health vendors, including third-party administrators (TPAs), networks, a pharmacy benefit manager (PBM), an employee assistance program (EAP) provider, a wellness company and a disease management company. Although these organizations may be providing valuable services and information to employees, the multiple links, touch points, phone calls and e-mails can create confusion and cause employees to withdraw from the information-gathering process. Simplifying and rationalizing access using Internet technology will allow you to increase employee satisfaction and generate greater engagement in the process.
  
  
• Health Education Resources Need To Be Offered With an Incentive to Use Them Our data shows that health education resources by themselves are not an important driver of satisfaction unless the plan encourages their use, through a consumer-driven health plan. This is an important lesson and seems to indicate that a "communications-and-tools only" approach to consumerism is not likely to be effective.
  
  
• Communicate the Total Cost of Coverage Particularly as employees are being asked to share more of the cost of their coverage, it is important both to let them know the total cost and to emphasize that the majority of that expense is being borne by their employer. There are several ways to do this, including the following:
  
  
  • Personalized Benefit Statements Benefit statements are a great way to document the value of all of the programs the employee participates in. This can also be done as part of a total compensation statement.
    
    
  • A Flexible Benefit Plan with Credits and Price Tags This framework facilitates the communication of overall plan cost and how much of that cost is subsidized by the employer. Offering multiple plans also allows employees to see the value of each plan relative to the others, and make informed choices about level-of-coverage vs. amount of payroll contribution.
    
    
  • Communicating Pay Adjustments and Health Plan Cost Changes Just like communicating a profit sharing distribution at bonus time, making changes in the cost of the health plan part of the annual pay review cycle drives home the point that health benefits are part of pay. If the employer subsidy towards health care increases by 8 percent, that means that portion of total compensation (i.e., the portion attributable to the health care plan the employer provides) increased by 8 percent. That is much larger than the average merit increase.

Options for Improving Satisfaction with Retirement Benefits

Strategies for improving satisfaction with retirement benefits include the following:

• Promote Retirement Planning The ROW Study points to the need for continued education about saving for retirement. This is particularly important as this burden falls more and more on the individual. Although the impact on turnover and productivity may not be very large, providing additional education about and support for saving for retirement appears to present an opportunity to gain some ground without a significant investment. Because the ROW Study data shows that concerns increase as employees age, employers should customize their educational programs by age group.
  
  
• Maximizing DC Plan Participation The ROW Study data indicates that a key driver of retirement benefit satisfaction is the savings plan offered by the employer. Optimizing participation in these plans should serve to increase satisfaction. Automatic enrollment, coupled with targeted communication, is a great way to do this. The new pension legislation makes this alternative more attractive to employers.
  
  
• Consider Alternative Plan Designs Offering a DB plan and a DC plan is clearly valued by employees. Funding a traditional DB plan, however, is not practical (and, in some cases, too risky) for some employers. Those employers might consider a cash balance plan. Cash balance plans offer some of the benefits of a traditional DB plan with a risk profile closer to a DC plan (from the employers' perspective).²
  
  
• Communicate the Value of Retirement Benefits Good communications have a positive impact on retirement benefit satisfaction. The better employees understand the plans, the more they appreciate them. This is another inexpensive way for employers to increase the return on their investment in retirement benefits.
  
  
• Think about Retiree Medical Coverage Even if it is too expensive to subsidize a plan for retirees, an employer can make plans available to employees and educate them about saving for their health care in retirement. For example, high-deductible health plans (HDHPs) that include Health Savings Accounts (HSAs) provide a great opportunity to communicate the importance of saving, not just to replace income in retirement, but to also fund medical care needs.

Acknowledge (and Compensate for) the Flip Side

It is important to recognize that just as benefit improvements can enhance benefit satisfaction, benefit reductions will have a negative effect on affiliation and possibly turnover. In fact, the ROW Study finding that benefit satisfaction has generally declined over the last six years is probably attributable to the cost-shifting and benefit reduction that has taken place over the last several years in response to cost pressures and the drive towards pay for performance. Although this trend has not yet manifested itself in increased turnover, if the trend continues, it may.

Of course, employers that decide to reduce benefits, may be able to offset the potential impact on affiliation by making other changes that enhance affiliation or some other component of the employee value proposition. Pay-for-performance strategies, for example, seek to reduce those components of pay that cannot be varied based on performance, like benefits, but build in opportunities to earn more cash compensation. If changes like this are communicated carefully to employees (and this is critical), the impact on productivity and turnover will likely be minimal.

Other Options for Enhancing Affiliation

Although benefit satisfaction may not directly affect turnover and productivity, and the connection between benefits and organizational affiliation should not be ignored, other factors may have a greater impact on enhancing affiliation. These include compensation, improvement in pay processes and trust in management.

For example, the amount of pay is not the only consideration. Employees have different preferences for cash and benefits, and the willingness of employees to pay for benefits varies across employee groups. For example, employees over age 45 are more willing than employees under age 30 to trade cash for benefits. This is not a new idea. The ROW Study does not directly capture the value of such trade-offs, but it does point towards the importance of allowing employees to make them.

Conclusion

The following are among the key conclusions about benefits from Sibson's latest ROW Study:

• Benefits are not the primary driver of turnover and productivity. Benefits influence turnover and productivity indirectly by enhancing organizational affiliation. This implies that (a) employers need to keep an eye on benefit satisfaction and (b) they have some flexibility in making changes before turnover and productivity are significantly impacted.
  
  
• Health care benefits are the key driver of overall benefit satisfaction.
  
  
• Choice and the ability to trade benefits and cash are important drivers of benefit satisfaction.
  
  
• Helping employees understand how to better save for retirement might be an important avenue for improving understanding and satisfaction with your retirement plan.

It is important to keep in mind that the impact of benefits on affiliation varies depending on the rewards of work that your organization offers, the industry in which you operate and the demographic profile of your workforce. Focusing your benefits investments in the areas identified above should help your organization get the biggest bang for the buck.

John Asencio is a Senior Vice President and Leader of Sibson Consulting's Health Practice. He can be reached at 212.251.5085 or jasencio@sibson.com.

1	These results are based on regression analyses of the ROW Study data and reflect the indirect relationship between benefit satisfaction and turnover via affiliation.
2	For more information about the financial efficiencies of cash balance plans, see Sibson's January 2007 Spotlight, "Green Light for Cash Balance Plans Presents an Opportunity to Conserve Cash and Lessen the Bottom-Line Impact while Maintaining or Improving Retirement Benefits."