Linking employee benefits to talent management

Last Updated Oct 24, 2008 2:28 PM EDT

McKinsey Most companies treat benefits as a cost of doing business. They should see them instead as a competitive weapon.

As the bill for US health care mounts, companies struggle to reconcile their need to offset the rising cost of employee benefits with the desire to attract and retain the best talent. Some engage in an arms race of sorts, blindly matching or beating the benefits offered by competitors and spending billions of dollars in the process. Yet these benefits often fail to reflect either the preferences of employees or corporate objectives.

A few companies, however, are changing the game. Emerging best practices are reducing the cost of benefits by 10 to 20 percent a year, keeping employee satisfaction steady—or better—and linking these expenditures more tightly to corporate objectives, particularly investments in talent to gain competitive advantage. Such investments are increasingly important to the profitable growth of the world's most successful companies: from 1995 to 2005, profits per employee jumped to $83,000, from $35,000, and the number of employees more than doubled. Benefits represent a major part of that outlay: US companies spend more than $2 trillion on them each year, but though the cost of health care in particular is on the rise, companies aren't scrutinizing benefits as closely as they do other investments.

Benefits are much more than just a cost of doing business, even though many executives don't understand that. In many companies, the chief financial officer hands down a cost goal for benefits each year, and then the HR department works to meet it. In the end, business unit leaders get stuck with increasingly expensive benefits without understanding what they get in return.

We advocate a much more active approach: employers should tailor their investment in benefits to the preferences of their employees, as some leading companies do already. The same sophisticated market research tools companies now use to launch products and services ought to be used to define employee "customer" segments. Benefits packages should then be tailored and marketed to them accordingly. This approach, balanced with return-on-investment (ROI) objectives and rolled out over several years, will help companies meet their increasingly vital need to offer knowledge workers higher rewards while minimizing the cost of employing a large frontline workforce.

Treating employees as customers

When buzz about a potential change in benefits makes its way through employee networks, they often respond with anxiety and consternation. Companies should approach them with the same caution that consumers get, using market research to understand the workforce, segment it, and gauge its responses to potential changes. When a company tinkers with benefits, it should "brand" the adjustments with themes that research shows are important to employees. Then it should aim those themes at relevant employee segments and actively address the concerns of people who will dislike the changes, while also emphasizing the positive ones that other segments will applaud.

These efforts should take the form of a marketing campaign, similar to what the company would use to launch a new product, that emphasizes aspects of change employees will value. E-mail, the Web, mailers, and company newsletters ought to explain, in simple language, the nature of the changes, their rationale, and the improvements they will bring. Such communications should also directly address things that certain segments of the workforce may dislike, balancing these changes with the positive ones dictated by the preferences of the majority. A benefits "hotline" (on the telephone, the Web, or both) lets employees ask questions and voice concerns. This important tool helps the company to get real-time reactions and to identify and lubricate squeaky wheels.

Such an approach is particularly important in union environments. One heavily unionized manufacturer, for example, is marketing its benefits with the theme "empowering you to better manage your health" through new nurse hotlines and increased preventive-care coverage. Its marketing campaign appeals to that large segment of employees who value broad health care services above all other benefits. When negotiating with unionized locations, the company's leadership, understanding that the largest segment of union members values higher take-home pay more than rich benefits packages, emphasizes the point that soaring benefits costs make it harder to raise wages.

These principles can be applied in nonunion environments as well. A major transportation company, for example, launched an effort to save more than $100 million a year, in part by cutting its annual spending on benefits by 10 to 15 percent. One element of its plans—a dramatic cut in retirement benefits—stood to upset employees greatly. Research into their attitudes showed that although this move was extremely unpopular, the more they knew about the overall package, the more satisfied with it they were. Furthermore, the research revealed that most of them didn't realize the richness and breadth of the benefits offered. The company used these insights to plan a broad campaign to educate the nonunion workforce on the virtues of the package. It also added several low-cost benefits, which allowed it to cut others, to save money overall, and to minimize employee dissatisfaction.

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