In order to secure continued investment in benefits, HR must prove perks’ financial return, however, this may be easier said than done, says Nick Golding
Spending money without giving it a second thought is a luxury that only the fortunate few can afford. The rest of us, however, will want to see some sort of tangible return on any investment that we make, whether that is in the form of a financial profit, or in goods or services.
Organisations are no different. If anything, they are more prone to watching the pennies and holding individuals to account for cash spent. HR and reward teams perhaps struggle more than most when it comes to benefits expenditure as it is hard to prove a tangible return on investing in some perks. Simply saying ‘it makes staff happy’ will not be enough to convince a finance director of the merits of reward.
However, there are few finance directors whose ears will not prick up when they are told of the savings on national insurance the organisation can make when employees take up perks through salary sacrifice, such as pensions, childcare vouchers and bikes for work. When it comes to other benefits, such as flexible working arrangements and wellbeing perks, though it can be harder to provide evidence of a return on investment.
Damian Stancombe, head of employee benefits at Punter Southall, explains: “The finance director has to sign the bill for new benefits, and won’t go for the fluffy explanation. He or she will want to see hard data.”
Exact figures, however, can be hard to come across, but HR departments are becoming wise to the fact that they need to apply science to benefits, and use statistics on areas such as labour turnover and sickness absence, for example, to demonstrate the impact of benefits. Steve Herbert, senior benefits education consultant at Origen, says: “The main savings that benefits can offer are around recruitment, because if you save just one or two jobs per year at a company you are saving interviewing time, advertising costs, agency fees and even gardening leave costs.”
Kent County Council has, for example, calculated its overall staff turnover, then compared this figure to turnover levels among employees that participate in its benefits programme in order to show a return. It identified a marked difference between the two figures, which it attributes to the fact that staff taking up benefits may be more loyal than those who do not. Jane Vivier, reward adviser, explains: “Across the board our turnover is between 10% and 11% but, in the section of the workforce that take up salary sacrifice benefits, turnover is just 2%. While we can’t say that it is only benefits keeping people at the organisation, we can go some way to getting the loyalty buy in.”
The council has also calculated that each employee leaving the organisation costs it around £3,000.
Such statistics can be used to demonstrate the return organisations can gain from investing in perks that help retain staff. Many employers, however, still have some way to go before they reach this stage, and have yet to even calculate a base turnover rate. Without this, there is no way of identifying the effect of new benefits.
To strengthen the case for introducing new options, and further calculate the return on existing benefits investment, employers could benchmark turnover rates against other organisations in their industry, adds Herbert.
“Some HR departments don’t even know what their [staff] turnover rate is, and they really need to get a handle on this before new perks are introduced. Also benchmark with other organisations, to ensure that you are on a par with your industry or competitors,” he explains.
High staff turnover will obviously result in high recruitment costs, so HR departments should also make efforts to calculate the costs of recruitment, which can then be compared with the cost of providing benefits that help to reduce turnover.
This is the approach taken by Oracle, which has calculated how much it costs the organisation, not only to recruit staff, but also to bring them up to speed in their new role. Chris Wilson, benefits director for Europe, Middle East, and Africa (EMEA), explains: “I actually tend to monitor the cost of recruitment and bringing an employee up to speed. So if the benefits you are proposing are going to have an impact on retention, extending someone’s employment can have a financial impact on the bottom line.”
In addition to their impact on staff turnover, some benefits can play a crucial role in reducing sickness absence levels. By capturing these figures, therefore, reward teams can use this data to help prove benefits offer a return on investment.
“If you have an absence management tool, you can record the reduction in days being taken off sick after new benefits are brought in,” says Stancombe.
Calculating an organisation’s absence rate does not need to be a complex or expensive task. As long as employers can record what days employees take off sick, even if this is simply entered in an Excel spreadsheet, they will have the information that they need.
Another way of coming up with statistics around absence costs is to use free online modelling tools that simply require data to be entered about the number of employees at a company. Some providers, such as Bupa, offer the service through their websites.
Although such tools will only provide employers with a rough idea of how much absence costs their organisation, which is calculated using the average cost of sickness in the UK, this can still be helpful when used to prove the importance of benefits in driving absence costs down.
Not all benefits can be easily linked to staff absence, however. It can be notoriously difficult to demonstrate the impact of wellbeing benefits on absence levels, for example. One option for employers looking to show a return on this type of perk is to identify the impact that they may have on other healthcare benefits.
Investing in perks such as an employee assistance programme and on-site services, including doctors or physiotherapists, for example, may help to lessen the likelihood of, or reduce the duration of, staff drawing on other options such as private medical insurance or income protection. In the long term, this may help to lower an organisation’s premiums.
Another benefit that often represents a significant spend on the part of employers is an employer-sponsored pension. Yet, typically, this is a benefit that HR grapples with the most when it comes to proving a return on investment. “The majority of spend will be on pensions. Employee contributions can be 10%-15% [of the salary bill] for the employer, so first and foremost the finance director wants to know: ‘why do we have this benefit in the first place, is it recruiting and retaining?’ But this is a very hard benefit to judge,” explains Punter Southall’s Stancombe.
One option is for employers to survey employees, asking specific questions around the pension scheme and whether it is a driver in keeping them engaged and productive, as well as whether it is a factor in retaining them. Hard data to justify the huge spend, however, is much more difficult to come by.
Several providers have now launched products that they claim can accurately assess the financial return on benefits. Thomsons Online Benefits, for example, offers a product that can give HR departments a figure on the type of return they get on investing in reward. Chris Bruce, director of marketing and technology at Thomsons Online Benefits, explains: “We take simple information such as how often employees are engaging with their [perks], benefit entitlement and take up, and then measure how much [employees] value their benefits against the amount the employer actually spends on those.”
The online programme can then collate reports that can be used by HR departments to illustrate the importance of benefits to their finance department.
The system can also measure employee turnover against benefits spend, and use this information to forecast the future cost of perks against that for absence and turnover. “An employer could probably pay a consultant to calculate this information but we can offer it at a click of a button,” adds Bruce.
Some consultants, however, are less enthusiastic about such tools. “I haven’t seen any evidence that these work, I can’t see how they would work, as it would have to be done on a company by company basis. The only real way to demonstrate [a return on investment] is through reduced sickness absence and staff turnover,” says Herbert.
Other providers offer tools that focus on specific benefits areas. Software provider Ceridian, for example, offers an absence calculator that enables employers to input data that is built around assumptions and potential scenarios that may befall their organisation in order to gain an understanding of the costs that situations such as high stress levels can incur.
Paul Avis, corporate development manager at Ceridian, explains: “We have our Dynamic Reporting Centre where employers can input assumptions and data to get a very real picture.”
Towers Perrin’s Total Reward Optimisation (TRO) tool, meanwhile, is a web-based product that quizzes employees about the benefits on offer and the ones they would like to see. It also asks questions about which benefits would encourage them to stay with an organisation, reduce absence or improve productivity.
Armed with this information around which benefits are the most sought after, the company can put costs to the data, and calculate the amount needed to invest in reward to help retain staff, explains Jim Crawley, principal at Towers Perrin. “You have to put some costs around the employees, for instance, if you are trying to reduce labour turnover you will know that by providing one benefit package a certain number of employees will stay [on],” he says.
Despite this, Crawley is realistic about the challenge that benefits professionals face in proving the return on investment on benefits expenditure and insists that no tool can be entirely accurate. However, he adds that they can be “strongly directional”, which should be enough to gain the backing of finance teams.
Clearly this is a tricky area but, by applying science to benefits, employers may be able to identify fairly reliable statistics to help prove that the right perks go some way to providing a return, even if this is not immediately obvious in hard cash terms. Benefits teams, therefore, need to carefully communicate this message to those holding the keys to the company safe.
Return on investment†
By offering tax-efficient perks through salary sacrifice to staff, the employer can save national insurance on the pay that is sacrificed.
Recording staff turnover rates before and after new benefits are introduced may go some way to†wards convincing the finance director that investing in relevant perks can save the company long term if they reveal an improvement in employee retention. this will then reduce the need for expenditure on areas such as recruitment, advertising and temporary staff fees.
Staff absence can also be recorded before and after benefits are launched. If after six months of introducing a counselling service, for example, 10 employees who were signed off work with stress have returned, the finance department can’t fail to see the potential to save cash.
Products on the market†
Web-based software can create data that finance directors want to see, as well as surveying staff about which benefits would be most effective at keeping them at work, for instance.
Case study: Reducing absence at Virgin is not pie in sky
When looking to demonstrate a return on its benefits investment, Virgin Group looked at absence levels, recording these both before and after new healthcare benefits were introduced.
One of the new benefits provided was an on-site physiotherapist to help employees deal with muscular problems at work.
Caroline Jowett-Ive, group reward manager, explains: “Sickness absence is a good one. You can usually link the money spent on healthcare benefits, particularly the on-site physiotherapy, to reductions in absence.”†
The organisation’s finance department was also interested in the savings that could be made on certain benefits. Jowett-Ive found that the potential financial savings that could be made on group risk benefits, for example, helped to prove that investing in such perks was a worthwhile decision.
When it came to providing hard data, however, Virgin Group’s HR team ran into issues with the fact they wanted money to spend on benefits but had no real evidence to prove how the business would improve after these were introduced.
To overcome this, it drew upon data from other companies that had introduced perks, which helped to prove the potential return on investment, adds Jowett-Ive.
“It can be difficult to get initial buy-in from the finance director because they can’t see the trends,” she explains.