As the green shoots of economic recovery begin to appear, employers need to assess the effectiveness of their reward packages, says Jenny Keefe
Economic recovery may be a long, painful journey, but employers need to plan now for when better times return. Benefits are crucial to an employer’s desirability in a recovering market because once workers have the pick of the bunch again, the compromises they were willing to accept in tougher times suddenly become a sticking point.
Joanne Powell, a senior consultant at Xafinity, says: “While the job market is contracting, top performers are less likely to move. However, once the situation improves and recruitment starts again, top performers will be in great demand. How people were treated during a downturn will be a key driver in how they perceive their employer in the future.”
Modest wage rises for some
There are already signs that employers have one eye on the upturn. Among stories about organisations halting pension contributions, freezing pay and asking staff to work for free, some workers are enjoying modest wage rises. Figures from IDS Pay Databank show a median pay rise of 2% across the economy so far in 2009.
“Despite the recession, there is still evidence of bonuses and increases across the economy,” says Powell. “The focus has started to shift to targeted rewards to attract and reward the top talent.”
For many employers, the gloom is not about to lift any time soon. Many organisations are still torn between cutting costs to stave off redundancies and trying to restore sinking morale. The Employee Benefits Research 2009, published in May, found 43% of employers want to boost motivation, but 29% have imposed, or are planning, pay freezes.
Managing costs and keeping workers happy
The question many organisations are grappling with is: how can they manage costs now but keep workers content in the long term? The key is to arm themselves with as much information as possible, says Robin Hames, head of technical, marketing and research at consultancy Bluefin. “Find out the relative popularity of each benefit, then maximise savings from the least valued ones,” he says. “A quick online employee attitude survey will help to spot opportunities.”
One tactic is to tweak insurance terms and conditions to lower the cost of risk benefits. “Savings can be made by focusing risk benefits more closely to the requirements of the current workforce,” says Hames.
Downgrading private medical insurance
For example, employers could consider downgrading the level of private medical insurance (PMI) they offer, look at whether insurance could be restricted to employees, rather than also offered families and partners, and raise excess levels.
Another way to minimise costs, but maximise motivation, is to allow staff to buy extra holiday. This enables employees to take a break and employers to save money when there is not enough work to go round. “Allowing employees to buy extra days’ holiday can save national insurance (NI) and can be offered online at little cost,” says Hames. “These savings have little effect on employee engagement because, at worst, they are morale-neutral.”
Remind staff about existing perks
It is also worth reminding staff about existing perks. Lee French, proposition director at Alexander Forbes Financial Services, says: “Employers should continue and improve the communication and awareness of their benefit packages. In most cases, it is going to cost very little to remind the workforce about the benefits available, which might have been forgotten about. Online total reward statements provide an easy way to do this, as does the intranet or an email.
“If an [organisation] cannot convince its talent that it is still interested in investing in them and is able to do something to reward them when the going is tough, employees are likely to lose confidence and begin to think about other employers. If employers do not take action now, they might find their key workers leaving at an increasing pace over the next 12 months.”
Pension scheme payments dilemma
A common dilemma facing employers is whether to suspend payments into their occupational pension scheme until the recession bottoms out. In July, for example, American Express stopped making contributions to both its stakeholder and final salary pension plans for its UK workforce. The credit card company took the decision after consulting its employees, and is planning to reintroduce contributions no later than January 2011.
But suspending pension contributions is a tricky decision. Although temporarily halting employer contributions is common in the US, UK organisations are more reluctant to use their pension schemes to save cash. And any employer that wants to take such action has to involve staff in a two-month consultation on the plan.
Unless they absolutely have to, employers should avoid touching pension payments, says Peter Smith, managing director of Benefex Financial Solutions. “Although suspending payments will provide a finite saving to the organisation, it can be damaging to the long-term financial health of the employee, who may harbour resentment towards their employer once market conditions improve,” he explains.
“In fact, in a rising market, more rather than less should be invested in pensions to take advantage of the recovery in fund values. In reality, a pay cut could be less costly to the employee.”
Pensions salary sacrifice arrangements
Adrian Glew, a director at The Personal Group, advises employers to consider pensions salary sacrifice arrangements as an alternative. Through such schemes, staff give up part of their salary in return for pension payments. The advantage of salary sacrifice arrangements is that employers save up to 12.8% of salary in NI contributions, while employers save on both tax and NI.
“Schemes can be implemented in about two months, and success rates can be around 95% of the total possible,” explains Glew. “These savings are permanent and will place the employer in a better position both now and in the future.”
Look after staff in bad times
However, if employers are canny, it is possible to make short-term changes and still keep staff happy. Mark Carman, marketing and communications director at Motivano, says: “Some organisations have used tactics such as reducing hours and negotiating pay cuts or reduced bonuses, alongside effective benefits communication.
“When recovery comes, the organisation’s workforce will be engaged and appreciate the effort their employer has put into making the business work in tough times. They will also have significantly reduced recruitment costs, because the top talent is still in place.”
This is exactly what engineering consultancy Hydrock did. Its marketing director, Jane Stanbridge, says: “We are committed to looking after people during the bad times as well as the good.”
Flexible approach to perks
The company, which has 330 workers, took a flexible approach so it could easily build perks back up when growth returned. “In teams where business had significantly dropped off, we used a range of measures which have been discussed and agreed with individuals,” says Stanbridge.
“Options included a four-day week, deferred pay and taking sabbaticals. All teams are now fully employed again and prospects are looking good.”
It is also worth giving some thought to bonus plans that can hook staff when better times return. Martha How, head of reward consulting at Hewitt Associates, says: “Consider and design retention plans where a cash bonus accumulates, to be paid out only to those who stay beyond a certain time period.”
Re-adjust bonuses when things improve
But employers must remember to re-adjust bonuses after health returns to the business. “Bonus criteria should definitely be revised coming out of recession, to avoid overpaying where employees have beaten targets that were very low in the first place to account for the downturn,” says How. “This needs to be done fairly, but it is a very common mistake.”
Employers should also avoid falling into the trap of thinking that all perks need to be reinstated after the rebound from recession. In a falling market, the puff surrounding perks is stripped away, leaving the bare bones of what makes a good package.
Pete Harris, rewards and benefits manager at Friends Provident, says: “The economic situation has driven organisations to review reward packages and simplify arrangements. This is of particular benefit where schemes had outlived their usefulness, or were unnecessarily complex. I anticipate that organisations will continue to offer a range of core benefits, but will be cautious about reintroducing benefits that did not add real value.”
Plough savings back into perks
When the upturn arrives, employers should plough savings back into perks, says Bluefin’s Hames. “Savings achieved through risk benefits redesign could be redirected into pensions or a new benefit. Savings from salary sacrifice could pay for new total reward or flexible benefits.
“One word of warning, though. With automatic enrolment scheduled for 2012, pension costs may rise sharply, relatively early in the recovery cycle, unless employers review their pension strategies quickly,” says Hames.
Keep promises to staff
Finally, whatever action employers take, they must keep their promises around benefits. Pay cuts hurt, as do reduced hours or suspended pension contributions, but nothing is as bruising for workers as facing years of lower pay and benefits.
“Organisations need to deliver on their promises that things will get better when the upturn happens and the good times return,” says Motivano’s Carman. “Regardless of how engaged people are now, reneging on promises when business is booming will cause big problems for the business as employees will vote decisively with their feet.”
Case Study: Mace Group
Mace Group builds employee engagement
Construction group Mace is planning for recovery by building up its reward schemes, despite gloom in the sector.
HR director Kath Knight explains: “Unlike many in our industry, Mace Group has not taken any action to reduce employee benefits during these challenging times. In fact, we have made improvements to schemes in the last two years, including pensions and private medical insurance.
“While costs had to be considered, the board quite deliberately chose not to reduce [employee] benefits. This has helped us to achieve very high levels of employee engagement.” Knight hopes this will put the company, which has 1,950 UK staff, in a strong position when the job market revives. “It is employees who determine the quality of service provided to clients,” she says. “Treat staff well in good times and challenging times, and they will provide great service to clients. The market can, and will, change, and employees will remember how they were treated.”
Case Study: Computacenter
Honesty is the best policy for Computacenter
Computacenter is reviewing its benefits package with the aim of helping staff until better times arrive.
Barry Hoffman, director of human resources, says: “In the current climate, staff value job security more than gimmicky perks. We are undertaking a review of all our benefits, working with providers, our employee forum and staff focus groups to better understand the mix of relevant benefits.
“For example, we need to know whether insurances or clean cash will be more important to the various parts of our workforce.” In a slump, non-financial rewards are important, says Hoffman. “We work with managers to ensure the softer rewards are not forgotten. Praise, recognition and honest communication all need to be emphasised even more when the perks and rewards are not as forthcoming as in the good times.” The secret to keeping staff engaged is honesty, says Hoffman. “Even if they cannot offer benefits now, employers should tell people what they are working on and what they hope to do when recovery comes for their business.
“It is crucial to be honest and not make promises that cannot be kept.”