Shift from pay raises to benefit rewards requires ‘holistic approach’ to benefit design

As employers continue to shift from pay raises toward creative benefit rewards to compensate employees, industry experts say it’s increasingly imperative advisers work with clients to take a holistic approach to benefit package design.

In the second quarter of this year, 31% of total worker compensation came in the form of benefits such as vacation time, health insurance and bonuses — up from 29% a decade earlier, according to the U.S. Department of Labor. Average hourly wages have grown slowly since the end of the recession in mid-2009, up about 2% annually or about 12% since the expansion began. Benefits, meanwhile, have increased 15%, which the Department of Labor statistics show is a continuation of a much longer trend. Since 2001, benefits increased nearly 60%, while wages advanced 40%.

“It used to be you would have double-digit salary increases, but I think what companies have done is they’ve balanced out the cash portions of their rewards program with the benefits,” says John Bremen, managing director and leader of Towers Watson’s talent  and rewards segment in the Americas.

That trend, he says, may be due in part to economic and regulatory constraints impacting employers, but it is also a result of increased employee demand for better benefits and a more welcoming work environment. Regardless, he says, advisers should be working with employer clients to create a holistic benefit package that meets the employer’s intended goals and employee desires.

“I have seen companies increasing their investment in healthcare. Although this may be partially due to the increased costs of healthcare, they also want to stay competitive with coverage levels,” says Bremen. “I have also seen companies wanting to stay competitive with 401(k) matches and environmental benefits such as free food, meals and beverages in the office — a more welcoming work environment.”

Also see: “How do employees really feel about their 401(k) plans?”

Employees, he says, are also self-selecting into companies based on finding programs that are attractive to them.

“We’re now seeing good data on employees willing to trade off higher salaries for good benefits,” he says.

Time off and perks like subsidized commuting costs and flexible schedules rank high on worker wish lists, according to surveys by the staffing service Robert Half.

A recent MetLife study showed nearly four in 10 workers said a wide selection of benefits would make them more loyal to their employer.

“Throughout the study, the positive impact of the number of benefits an employer offered was clear, likely because the greater number of options provides employees with the opportunity to tailor benefits to their specific needs,” says Todd Katz, executive vice president of group, voluntary and worksite benefits at MetLife. “Offering a comprehensive suite of benefits that goes beyond standard benefits … can drive both loyalty and engagement without adding cost for the employer.”

Employers and their benefit advisers, Bremen says, should look at the total rewards program holistically.

“Companies often make the mistake of looking at different programs in a vacuum,” Bremen says. For example, if a company has a health insurance program that ranks among other employers in the 60^th percentile, they may look at that and choose to cut the health benefits to save money.

“What they may not realize is their retirement program is in the 30^th percentile and their pay is in the 40^th. So the reason most people are coming to work for them is because of their healthcare,” says Bremen.

“I really recommend looking at the overall spend holistically,” he says. “The typical company with 20,000 employees spends $3 billion a year on compensation and benefits. I ask employers ‘How often do you spend $3 billion on something without finding out if it’s going to work?’ You shouldn’t be looking at this in a vacuum.”

What employees want

With that in mind, he suggests employers and their advisers also work to understand employee preferences, for instance through surveys and analysis.

“A lot of employees are afraid to ask employees for their preferences for fear they may not be able to satisfy them. But I tell employers to do so, even if they have to tell their employees, ‘We might not be able to act on this, but you’re important to us and it’s important to us to get your opinion,’” he says. “I think that’s very important.”

Also see: “Employees want face-to-face financial advice at work.”

It’s especially important, since managers and employees may have a disconnect. According to a recent Robert Half study, when asked which workplace perk they think their employees are most interested in receiving in 2015, 41% of chief financial officers said better benefits and 19% said more vacation days. In a separate survey, however, employees placed more vacation days at the top of their wish list (30%), just above better benefits (26%).