Strategic Reward supplement 2000

The survey Our research into reward strategy attracted responses from 500 decisions-makers from organisations of all sizes, representing all sectors

The strength of the response – in the face of quite a lengthy questionnaire – suggests that the issues in our survey hit a nerve. We sent out 6,000 questionnaires to employee benefits decision-makers and received 500 back in time for our deadline (quite a number more came in too late). Our respondents represent organisations from a wide range of business sectors – manufacturing, the service sector (excluding the public sector), and the financial sector are the best-represented among our sample, each accounting for around 15-16% of respondents. Organisations of every size are represented in the sample – 20% of respondents representing fewer than 100 employees, 9% representing more than 10,000. Geographically, there is a heavy bias towards England; with Scotland, Wales and Northern Ireland accounting for 5%, 2% and 1% of respondents respectively. But this may understate the penetration of the research into these areas since 39% of respondents say they represent more than one geographical region. South-east England is the best represented single region, accounting for 25% of the sample. The age profile of the respondent organisations is in line with our previous surveys: three-quarters report an average age of between 31 and 40; though there are some very young workforces – 13% report an average age of 30 or less. Most respondents represent pretty stable workforces, with staff staying, on average, at least six years, though more than a third (37%) report an average length of service of between two and five years and 6% would seem to have a real problem – generally losing staff within two years. Another sign of retention trouble is that 10% report average staff turnover exceeding 26% a year, and 18% have turnover levels between 16% and 25%. Most, though, enjoy much lower turnover: 42% report between 6% and 15%, while more than a quarter put the figure at 5% or less. Key findings

  • Traditional benefits like cars, PMI and pensions still dominate
  • PCPs top the list of benefits employers plan to introduce
  • Cost control is top priority
  • One in ten plan to move away from benefits towards cash
  • 69% say the reward package is clearly linked to business strategy
  • The number of flexible benefits plans has doubled since 1996
  • Three-quarters of those with flex found the administration simple
  • The most common benefit in flex and voluntary plans is PMI
  • 55% do not present voluntary benefits as a unified package
  • 58% do not record employee views on their reward package

Benefits provided The offerings aren’t so predictable – a quarter of organisations don’t have company cars, though half still have DB pensions

Although our research was much more to do with how benefits work, rather than what they are, the broad-based nature of the questionnaire gave us the opportunity to find out exactly what benefits our readers provide. It’s the first time we’ve had the opportunity to ask the question since our pre-launch survey, published in February 1997. Our findings suggest the shape of the typical package is changing – but slowly. Most benefits packages are still built round the company car, pension scheme, private medical insurance and life assurance (to that extent, no change from 1997). But the big picture conceals some interesting developments in the background. Three-quarters of our respondents (76%) say they offer company cars. But (while the two samples may not be strictly comparable) this is significantly less than the 94% quoted in our 1997 survey. And there are signs that the benefit may have been devalued in other ways: close to three-quarters (73%) of our 1997 respondents paid for employees’ private fuel, contrasting with fewer than half (47%) of the respondents to this survey. We didn’t ask respondents about the personal contract plan (PCP) alternative to company cars back in 1997, but 13% of this year’s respondents offer this benefit – a fact that may help explain the possible decline in the popularity of the company car itself. If there is a shift from car to PCP (and the evidence so far is less than conclusive), it may accelerate in the next 12 months. Some 3% of our respondents plan to dump their company cars and 10% say they will be introducing PCPs into the benefits package. Indeed, PCPs are top of the list of benefits our respondents plan to introduce. Pensions remain at the heart of most (88%) packages, though the exact nature may be changing. Despite all the doom and gloom surrounding defined benefit schemes, these remain the most commonly provided pensions among our respondents. And although 3% plan to introduce new defined contribution schemes and 9% are planning new ‘stakeholder compliant’ schemes, it does not appear that this will be at the expense of existing defined benefit arrangements. Only 1% of respondents say they plan to ditch their current DB schemes; the same proportion hope to get rid of their current DC arrangements. If the shape of pensions provision is changing, it’s through evolution rather than revolution. It is perhaps surprising that as many as 11 (2%) respondents have signed up to so-called ‘stakeholder compliant’ schemes, before details are finalised. Another 45 (9%) have definite plans to introduce them, putting them second in the list of benefits that respondents plan to bring in. PMI is the second most commonly provided benefit: 81% already have it, and another 3% plan to introduce it. As with other ‘status’ benefits, like cars, it is likely that many of the organisations covered by the survey limit coverage to senior staff – at least where the employer is paying. But PMI also tops the list of benefits provided to staff on a flexible or voluntary basis – which suggests employers are finding ways to extend cover without too much extra cost. This might also provide a clue as to how such traditional ‘paternalistic’ benefits could be used in an environment of ’employee empowerment’; and allow old-style benefits to be used to accommodate modern business objectives.

Overall strategy Most believe that reward helps recruitment, retention and output but few use formal methods to measure its effectiveness

This research is all about viewing reward in the wider business context. So we asked our respondents about the general organisational issues they face. In particular, we asked them to describe the current culture of their organisations and the culture they’d like to see develop. The results suggest many organisations are not too far from where they would like to be. Characteristics commonly cited as aspects of desired culture, such as team working, openness and flexibility, already feature strongly in many of the organisations represented by our respondents. But many will be seeking to change certain aspects of their culture. For example, the two characteristics desired by the greatest number of respondents – empowerment and learning (cited by 54% and 50% respectively) – don’t seem to have much of a foothold in current culture. Only 27% say their organisations are already empowering, while even fewer (21%) say they represent learning organisations. Conversely, 53% say their current organisational culture is reactive, while only 8% say this is part of their desired culture. Paternalism is another characteristic that many would like to do away with. Cultural change may be engineered to meet organisational objectives, or it may be imposed, as a result of a takeover or merger, for example. But it usually throws up problems for the HR department. Indeed, one in five (19%) say major cultural change is causing significant problems – as such, this is the problem felt most acutely by the largest number. It is not, however, the most widespread problem – in total. Although two-thirds (64%) say it’s a problem to some, or a significant, extent 78% cite the recruitment of key employees. Meeting the aspirations of staff is cited by 81%; and (no doubt necessitated by major cultural change in some cases) responding well to change is cited by 73%. Many of the challenges that respondents face centre on the need for greater flexibility and an employee-centred approach in HR. But many respondents are also facing the traditional challenges of poor staff morale (cited by a depressing 65%) and managing poor performance (mentioned by a shabby 64%). Other problems, such as high staff turnover, may be less widespread, but hit certain organisations very hard, with 13% saying it is a problem to ‘a significant extent’. Unsurprisingly, two-thirds of those with turnover exceeding 26% a year say this is a significant problem. Despite all the HR challenges, the most commonly cited issue in respect of the reward package is control of future costs – 74% say this is an issue (see page 9). There is perhaps a feeling that they are not getting value for money. Most (63%) include improving the perceived value of the reward package in their priorities. And 57% want to improve its attractiveness. Interest in improving the perceived value and attractiveness of the benefits is lower than for the reward package as a whole (cited by 46% and 38% respectively). It is not clear whether this indicates respondents’ greater satisfaction with perception of the benefits element of the package, or greater indifference to it. It may be that reward, incorporating pay, is seen as more suited to delivering business and HR objectives. As an incentive for improving performance, this is certainly the opinion. Almost twice as many respondents aim to link pay to performance as aim to link benefits to performance (61% compared with 33%). That respondents recognise the potential of pay to incentivise performance is hardly surprising, but is the potential of benefits underestimated? Likewise, more respondents were interested in matching the overall reward package to employee need (42%) than in matching benefits to employee need (37%). These findings suggest a tendency to focus on reward strategy in the widest sense. But just one in three respondents plan to go as far as to move towards a ‘total compensation’ approach to reward. On the other hand, while it would be going too far to suggest that organisations are turning their back on traditional benefits, only one in ten plan to move away from benefits towards a cash-only culture. Clearly, most of our respondents believe there is still an important role for benefits – particularly in the retention of valued staff. More than half (53%) say benefits are effective in this respect and the figure rises within organisations that have good retention levels. More than two-thirds (69%) of those with staff turnover below 5% a year rate the effectiveness of benefits as a retention tool, compared with just 31% in organisations where turnover exceeds 26%. There is also a relatively enthusiastic thumbs-up for the effectiveness of benefits as an aid to recruitment (endorsed by 48%). Respondents are more ambivalent about the effectiveness of benefits in other areas, however. Around a third see benefits as a tool for improving staff performance, while a quarter say they improve staff motivation. Perhaps the effectiveness scores for the benefits package are generally low because organisations are not making benefits work hard enough for them. Less than a third (31%) say their benefits package reinforces company culture, yet presumably this is one thing organisations have the power to do something about. Perhaps benefits would be more effective in recruiting, retaining and motivating if they were more representative of the organisation? Respondents from the financial services sector are the most confident that their benefits fit company culture: 41%, compared with 31% overall. This sector is most confident of the effectiveness of benefits: 60% rate them as a retention tool (compared with 53% overall); 35% say benefits improve motivation (compared with 26%); 45% say they encourage better performance (compared with 32%); and 37% say they help staff balance work/life commitments (compared with 22% overall). It’s only in the areas of recruitment and managing sickness absence that the sector is slightly less enthusiastic than the sample as a whole. Our research gives no clues as to why the sector tends to rate benefits more highly than others do. But we can hazard a few guesses. Perhaps financial service workers are, because of the nature of their work, better informed about, and therefore more appreciative of, the benefits package. Perhaps the traditional benefits package of pension, PMI, life assurance and company cars is more appropriate to workers in this sector than those in some others. These are just guesses, of course – a bit like most employers’ estimates of the effectiveness of their benefits. Few measure this effectiveness in a systematic way. This is also true of overall reward strategy. Just 15% agree ‘to a great extent’ that the effectiveness of their overall reward strategy is measured regularly, although another 35% say this is true ‘to some extent’. Perhaps employers are too busy looking over their shoulders at what others are doing to spend too much time assessing the effectiveness of what they have already got: 61% benchmark reward against that of competitors; more than one in five do this ‘to a great extent’. On the whole, larger organisations are more likely to benchmark than smaller ones – perhaps because they have more resources. More than one in three (37%) of employers with more than 5,000 staff benchmark in this way ‘to a great extent’ and another 43% do so ‘to some extent’. It seems that benchmarking is also more likely in some sectors than others: 41% of financial services respondents; 36% of building and construction companies; and 37% in pharmaceuticals and healthcare say they benchmark ‘to a great extent’. Although only half of our respondents actually measure effectiveness on a regular basis, 69% of them claim their reward strategy is an effective recruitment tool, 70% say it delivers on retention, 63% say it encourages desired culture and behaviour, while 56% rate its effectiveness in helping staff motivation and productivity. Our respondents’ assessment of the effectiveness of reward and benefits strategy may be accurate. However, their views would be more persuasive if they were always based on proper measurement. One area in which respondents have little confidence in the effectiveness of reward and benefits strategy is the control of sickness absence. This is a message repeated several times within the survey results. In all, less than a quarter of respondents (23%) see reward strategy as a tool for reducing time off work as a result of sickness. Only 3% see it as delivering on this ‘to a great extent’. Similarly, just 14% see the benefits part of the reward package as effective in reducing sickness absence. The other questions we asked about reward strategy were designed to produce a picture of how it is formulated, rather than what it delivers. More than two-thirds (69%) of respondents believe their reward package is clearly linked to business strategy and 55% believe that it is flexible enough to meet changing business needs. Respondents are also confident that their reward strategies are clearly explained to staff: 29% believe this is true ‘to a great extent’, while another 47% say it is true ‘to some extent’. In spite of this, respondents see room for improvement in communication. As mentioned, 63% aim to improve the perceived value of the reward package. But communication may not be all they have in mind here – 42% told us they were aiming to match the overall reward strategy to employee need, which might also have the effect of boosting staff appreciation. Some 57% of respondents believe their reward strategy already reflects and supports the career aspirations of employees. But in this part of the survey we did not ask whether strategy reflected employee aspirations in other ways. Other parts of the research suggest relatively low (though arguably increasing) levels of interest in employees’ work/life balance, for example. Most respondents appear reluctant to go to the horse’s mouth for information on how to meet employees’ needs – only a quarter of them involve staff in the design or modification of their reward packages. Nearly three-quarters (72%) of respondents say their reward strategy is sensitive to business performance, while almost as many (68%) specifically reward staff performance. Rather fewer (46%) have reward packages that specifically promote and pay for staff competencies. Having said that, UK employees these days are far more likely to see extra reward for extra effort and skills than simply for how long they’ve been with the organisation. That said, 31% of respondents say their reward strategy is still driven by length of service. The proportion rewarding staff for loyalty in this way does not seem to be greatly affected by an organisation’s record on staff retention. Getting on for half of our respondents (45%) already see their reward strategy as a source of competitive advantage. But a fair few others would like to improve the competitiveness of theirs. While 18% believe their reward package is already in the upper quartile for competitiveness, more than a third (39%) would like to be in this position. And while 17% put themselves in the lower quartile, just 2% say this is where they want to be.†

Strategies for flex Those that have implemented flex say admin is less onerous than expected – but many staff don’t make benefits choices

The number of flexible benefits plans has doubled in the last four years. And although only 62 of our 500 respondents currently offer flexible benefit plans, it is a method of delivering benefits that stirs much interest in our respondents. Nearly half (209) of our respondents without a flex plan have considered introducing one – or are currently considering it. So far, a third of these have gone on to reject the idea, while just 14 have now started with the design of a plan. Flexible benefits has been heavily promoted by providers and consultants as the way to merge two (or more) benefit packages or accommodate varying tastes. Although just more than half of those with flex did find it useful for this purpose, a significant 29% of all our respondents are more wary of the flex ‘magic’ and feel that rolling out flex wouldn’t do the trick. Those without flex expect to have more difficulty building a business case or convincing their own board that flex is the way to go, than getting the unions on their side. The experience of those that have implemented flex is that the board isn’t as difficult to persuade as expected, nor the business case as complicated to build. Of course, the reason these organisations already have flex may be that their boards are naturally more open to the idea. On the trade union front, only three (5%) respondents had any problems. It appears that many of the fears employers hold about implementing flex are overblown. The biggest hurdles expected by those without flex are administration, costs and employee communication. Despite all the reassurances from providers, complexity of administration is feared by 81%. Nearly three-quarters (72%) expect problems with getting effective software while a similar proportion (75%) expect high implementation costs. The good news is that those that have introduced flex have found these problems to be more imagined than real. Although 60% had problems with the complexity of administration, just 16% found this to be a major problem. Getting admin software was only a big problem for quarter, with 41% experiencing virtually no problems. The best news is that only eight out of 62 respondents actually had high implementation costs. Overall, nearly three-quarters found the administration of the plan to be simple or straightforward. Not one found it extremely difficult. Another big question for any organisation thinking of introducing flex is whether it will either reduce costs, or at least help control costs. Just five of those that have done it have managed to control or reduce costs, 29 more say it did help while 28 found it made very little or no difference to the costs involved. Paper is still king when it comes to enrolment methods, although if employer predictions are correct, it may be knocked off its throne by technology. The vast majority (74%) still use paper enrolment forms, as opposed to just eight respondents that use interactive software such as the internet or an intranet. However, this small number is set to triple with 15 organisations planning to adopt the hi-tech approach. Only four employers use meetings with staff – either one-to-one or in groups – to record choices. Not surprisingly, these are all small employers with less than 100 staff. Employers clearly see one of the pros of flex as being better targeting of benefits to employee needs – nearly 90% of our respondents hold this view. In fact, in most cases it appears that the traditional package is meeting a lot of employee needs in the first place. In 55% of organisations, less than 40% of employees made changes to their benefits as a result of flex. Only 16 respondents had more than half their staff wanting to make changes. A common problem is that staff don’t understand the package. Flex comes to the rescue here. Although nearly three-quarters of those without flex would expect it to promote understanding, those that have actually done it have found it exceeded expectations. Over half found it helped to some extent while a further third found it improved understanding to a great extent. There is a concern among 50% of those without flex that staff will not be able to make informed decisions. Where flex has actually been implemented, no employers found this to be a big problem and just a third experienced problems to some extent. The ability of employees to opt out of certain benefits raises the question of costs, because the employer’s ability to bulk-buy could be undermined. Although 13% of those without flex think this will be a big problem, with a further 49% expecting some impact, the reality is that 54% of those with flex had no, or virtually no, problems. Although 72% of those without flex would expect employee communication and education to be a problem, only about a third of these expect it to be a big issue. This possibly ties in to the fact that 65% expect some mistrust of the organisation’s motives for introducing flex. The reality is that those that have introduced flex have found communication and education to be almost as problematic as expected, but the mistrust is far lower than anticipated. Flex is frequently touted as a key way to improve recruitment and retention. However, among those that have implemented flex, only 11% found it improved recruitment to a great extent, and 6% found it improved retention to a great extent. But it is not a complete red herring – more than two-thirds feel there was some positive influence on recruitment and retention. The benefits most likely to be included in a flex plan are pretty constant. While a few organisations plan to increase choices, virtually none plan to remove any benefits. Topping the list of what is offered in a flexible benefits plan is private medical insurance, with 68% of flex plans offering it. Company cars come a close second, being offered in 65% of plans. Flex plans also tend to offer benefits not generally available in traditional packages. Although only 11% of our total sample offer dental insurance, 40% of our flex sample include it. Critical illness shows similar figures (going from 13% availability in traditional packages to 39% in flex), while life assurance goes from 7% to 39%. Leisure and retail vouchers make it into 10% of traditional packages compared with 16% of flex plans. Our survey shows some employers have also bitten the bullet and included one or more pension schemes in flex.†

Voluntary Benefits The vast majority of large employers offer employee-paid benefits but many fail to present them as a unified package.

Offering discounted goods and services on a voluntary, employee-paid basis is common practice among the majority of our respondents. These packages sit comfortably alongside traditional packages and for some employers they are a precursor to flexible benefits because they indicate employee interests and potential take-up levels. However, people using their own cash to buy benefits are not going to be as flash with it as those who have been allocated a set benefits fund to spend. Voluntary benefits are particularly common in very large organisations, perhaps because bigger employee populations mean that better rates can be negotiated. Nearly 80% of our respondents with more than 5,000 employees offer benefits on a voluntary basis. This falls to 42% of organisations with less than 100 employees. In most cases, organising discounted products and services is not simply a matter of distributing a bunch of brochures and leaflets and leaving it up to staff. Nearly three-quarters (73%) of employers allow payroll deduction. It is common for providers to insist on this so they can be sure of getting the cash. The money saved by not having to chase premiums and other debts helps increase the discount for the service or product. Less than half (44%) of those offering voluntary benefits present them to staff as a unified package. One wonders how much of the impact is lost if employees receive random brochures and leaflets, and how staff are expected to find out about the whole range of discounted benefits if there isn®’t a cohesive package. Perhaps this ties in to the lack of cohesion found by this survey between the different departments dealing with benefits, with each negotiating discounts within its benefit area, but not consulting with other departments. The strategic reasons for offering voluntary benefits are more likely to fall on the side of meeting employee needs than meeting business objectives. For example, a company may have a large number of part-time staff or high annual staff turnover. But, despite the extra flexibility they offer, voluntary benefits will rarely be appreciated as much as a traditional employee benefits package. Healthcare products and services are common offerings in voluntary packages. The widespread inclusion of private medical insurance (PMI) is striking, but falls in line with how often organisations generally offer PMI, either as part of a traditional package or in a flexible benefits package. This shows that although it is often included in the packages of senior staff, employers are aware that other levels of staff find it valuable too. Organisations are therefore happy to negotiate good rates, provided they don®’t have to pay for it. Insurances of all types are frequently included in voluntary benefits packages, although no particular type appears to dominate quite as much as PMI. Generally employers offer those insurance products that they think employees would buy anyway, such as annual travel, home and car insurance. Reinforcing this, products that are not likely to appear in a traditional or flexible benefits package but are included by a number of organisations as an employee-paid ®‘benefit®’ are motor breakdown cover (9%) and pet insurance (3%). A closer examination of the 280 voluntary packages offered by our respondents shows at least 44 different benefits. Half of these are common to a number of employers, but about 20 organisations have come up with benefits that are unique to them. These tend to be in the realm of extending healthcare cover to family members or discounts for health clubs and gyms. The ®‘most unusual benefit®’ prize goes to the small company that offers discounted holidays in south-west France.

Management The picture isn®’t good. Liaison between departments is poor, strategy is far from clear and staff are left in the dark

There is a strong trend for employers not to consult employees on either the reward package or the benefit package. Nearly three-quarters either do not, or hardly ever, involve employees in the design or modification of the reward strategy. The majority do not appear to put any effort into communicating the benefits package to staff, nor do they ask for feedback on it. Employers would appear to be paying little more than lip service to communication. Although three-quarters claim to explain their reward strategy clearly to employees, it is not exactly clear how they are doing this. Although the most common way of getting the message across is via booklets for new staff, only a quarter of our respondents actually use these. Face-to-face presentations are the next most popular, but only among 21% of respondents. Line managers, the company newsletter or magazines and other literature are also popular ways of getting the messages across. But as many organisations use a combination of these, it is only too apparent how many companies are not doing anything. If organisations are facing major culture changes (and nearly two-thirds are) then giving a booklet to a new staff member when they arrive and never broaching the subject again is not going to keep staff in touch with an overall reward strategy. No wonder 63% of organisations list ®‘improving the perceived value of employee benefits package®’ as a problem. Simply telling staff about it on a regular basis would be a good place to start. Not surprisingly, the benefit most likely to be treated separately from the rest of the package is pensions. The complexity and expertise needed leads 60% of organisations to separate it from the rest of the package. Company cars get the same treatment by half of all organisations. What is more surprising is that 36% separate out their motivation, incentives and awards. Don®’t they know that among the biggest issues facing reward strategy are poor staff morale and managing poor performance? From the disjointed nature of reward strategy, one might think that whoever is in charge has little idea of the overall objectives of the organisation. In fact, there is seldom one person in charge of reward and benefits. In most cases, the final decision is left to the board or to a management committee. So although the financial director almost never has the final say, he or she would probably sit on the board. When an organisation does leave it up to an individual (and very few do), it is most likely to be the HR director, or the compensation and benefits manager.