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Demand Performance for Benefits

January 1, 2000
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Related Topics: Benefit Design and Communication, Future Workplace, Featured Article
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At the threshold of a new millennium, employees should be viewing benefits as a part of their total compensation package, but they rarely do.

And it’s easy to see why. Though they can find salary information, tax withholding and more down to the penny on their paycheck stubs, few employees know the dollar value of the benefits they earn.

Without knowing the cost of their benefits, they also don’t know that many of those costs are rising. While employees directly feel the pinch of higher gasoline prices or more expensive movie tickets, they’re largely protected from price hikes in the benefits they increasingly take for granted.

But those realities are merely symptoms of a much larger phenomenon. Large organizations have eliminated hundreds of thousands of jobs over the last decade, and still are cutting jobs in record numbers. However, the job cuts aren’t dominating headlines because these people are finding new jobs. The new jobs, increasingly, are at smaller organizations.

Employees who have become more accustomed to generous benefit packages, however, go to their new employers with the expectation that the benefits will still be there. Few stop to consider the difference between one organization’s ability to provide those benefits and another’s.

At the same time, the job market has become more competitive than at any time in a generation. In an effort to attract and retain top talent, employers of all sizes have increasingly relied on benefits; it’s almost impossible for a company without benefits to hire the people it needs. The result of these circumstances is that employees now feel entitled to the benefits they receive.

It’s because of this attitude that there are a lot of forces working to preserve the status quo. It isn’t surprising that benefit plans have proven stubbornly resistant to the dramatic changes that have been made in compensation plans over the past few years.

Yet leading organizations have worked hard to move past the entitlement mentality. Instead, they offer pay plans linked to results and, as much as possible, rewarding top performers.

Wouldn’t employees begin to see benefits as part of their total compensation package if benefits were treated like the rest of the package—that is, tied to performance? That may sound like a radical concept, but ultimately companies may find they have to make that change if they’re to remain competitive.

Companies must first standardize and consolidate.
Although tying benefits to performance may be where we’re headed, few organizations are in a position to make such a change today. Instead, most companies must do two things first: standardize and consolidate.

Consider the example of Stamford, Connecticut-based GTE Corp. Through a series of acquisitions, the telecommunications company at one time offered nearly 400 separate benefits plans. Ultimately, the number proved untenable and the company implemented a flexible benefit plan called "GTE Choices" in 1992.

The change consolidated many active employee benefits plans, eliminated benefits plan confusion and offered economies of scale. GTE now has only one summary plan description, one marketing brochure and one overall approach. The new plan is more efficient to administer and more consistent.

Employee satisfaction at GTEskyrocketed. The GTE Choices plan has allowed the company to offer more flexibility and higher quality benefits to employees, while at the same time giving its business units the ability to decide how much to subsidize the program for employees.

Wouldn't employees begin to see benefits as part of their total compensation package if benefits were treated like the rest of the package—that is, tied to performance?

But not all organizations have done the hard work that GTE has accomplished. Many companies have plans that simply were cobbled together over time—one benefit after another added to the menu as employee needs were identified or perceived. And other organizations offer patchwork plans that are the outgrowth of mergers or acquisitions.

The result is that employees who are working for the same organization—but in different locations or different business units—aren’t eligible for the same benefits. And still other organizations have allowed operating units to develop unique benefit plans to meet the needs of their individual constituencies. None of these situations allows an organization to tie its benefit plan to overall business goals, which is a critical element if benefits are to be tied to performance.

"The benefits philosophy must reflect both how the firm creates competitive advantage from employee skills, knowledge and behaviors, as well as how employees value the various components of the employment product," explains Doug Merchant, a former HRmanager for AT&T. "The benefits philosophy must rest on the firm’s business and HR strategies."

In other words, organizations can only begin to link benefits to performance when they know the performance they want. At the simplest level, organizations that want short-term productivity increases might offer work/life benefits to those employees who demonstrate those increases. Organizations that are seeking long-term profitability are probably better off focusing on retirement plans. Such correlations already are being made.

Some employers already link benefits to performance.
In March 1999, the American Compensation Association (ACA) and The Segal Co. (a New York City-based employee benefits, compensation and HR consulting firm) jointly conducted a survey of ACA members to examine the extent to which their work/life programs are being used to reward employee performance. The survey, called the "1999 Survey of Performance-Based Work/Life Programs," confirms that employers are beginning to use nonmonetary compensation—particularly work/life programs—as part of their total rewards management strategy.

According to the survey findings, 18 percent of survey respondents currently use some work/life programs to reward employee performance. Although 43 percent of the surveyed organizations don’t use work/life programs to reward employee performance, they believe that some of these programs should be used as rewards for performance in the future. Twenty-four percent of respondents quantitatively link work/life programs to improved employee satisfaction, 65 percent said they either are or should be linking some work/life programs to employee performance.

The work/life programs that currently are most commonly used to reward employee performance—particularly flexible work schedules and paid time-off programs—are programs that are geared toward rewarding high performers with additional time to conduct personal business. As employers seek continuously improved employee performance and strive for employer-of-choice status within their industries, while always watching expenses, low-cost work/life "add-ons" like convenience services are ideal avenues for rewarding high-level performers.

If employees don't understand the tie-in between their total compensation and how well they do on the job, employers will forever offer something for nothing.

Beyond paid time-off benefits, there’s great potential for employers to expand the use of convenience services, financial planning, legal assistance and other voluntary benefits—which have broad-based appeal and are relatively inexpensive.

For example, convenience services currently are offered by 30 percent of the ACA survey respondents, yet less than 1 percent of those respondents use them as rewards for employee performance. Since convenience services are typically offered as time-savers for time-starved high performers, there’s an excellent opportunity to offer these services as reward incentives.

Perhaps the best-known example of a company that’s linking work performance to its total rewards strategy, including benefits, is Toledo, Ohio-based manufacturer Owens-Corning. In 1996, the company overhauled its comp and benefits strategy to create a variable plan that’s tied to performance. Workers clearly see how their work is rewarded with extra pay in the form of more benefits choices. Workers also get to pick from an array of options, making them responsible for their own choices.

The organization’s "Rewards and Resources" program has virtually eliminated the entitlement mentality, given employees greater choice and slashed the company’s fixed benefits costs.

Align your plan with other HR best practices.
If benefits truly are linked directly to performance, then don’t they cease to exist as benefits? Aren’t they then one form of compensation?

It’s a question of more than just semantics. The question challenges us to think about the entire nature of the employment relationship.

To stay competitive, we’ve given employees more responsibility for managing their own careers. For instance, employees are taking increasingly more responsibility for their own training and education. They have greater control than ever over how their retirement funds are invested. So does it really make sense for benefits to still largely be provided, in a paternalistic sense? Don’t we want employees to have more control, and doesn’t tying benefits to performance ultimately give them that control?

Some human resources professionals argue that it does.

"HR should get out of the benefits business. Pay employees well enough, and make independent benefit contractors available to them to handle this," says John Way, HRmanager for Elf Atochem N.A. in Carrollton, Kentucky. "They’re the experts. As mobile as the American worker is becoming, this would be a step in the right direction. Let individual employees be responsible for their own benefits."

It’s a radical idea, but one that would bring benefit plans more closely into alignment with other human resources best practices.

One thing is certain, if employees don’t understand the tie-in between their total compensation—including benefits—and how well they do on the job, employers will forever be offering something for nothing. It’s not an idea employers can afford to perpetuate, nor HR will want to market.

Workforce, January 2000, Vol. 79, No. 1, pp. 42-46.

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