Consider the original intention of employee benefits. Ostensibly, they could provide companies with a differentiated employment package for attracting and retaining talent in the face of stiff competition for skills. Over the years, though, a shifting tax regime effectively closed off a number of ‘benefit’ offerings by reclassifying them as fully taxable fringe benefits. The net effect has been that ‘employee benefits’ has devolved into little more than grudge purchases of a mandatory retirement savings fund, group risk scheme and, occasionally, a medical aid scheme. While this array of offerings clearly addresses a need by government and, to a lesser extent, employers, to provide employees with some measure of social protections, these undifferentiated ‘benefits’ do little to engage with employees around their real day-to-day needs.
Let’s start with the issue of saving. Retirement savings are the bedrock of employee benefits globally. Savings in general are fundamental to the economic growth of any country. Yet in Benefits Barometer 2016: 'Benefits models fit for South Africa', our survey of members’ views on savings indicated that, while members weren’t averse to saving as such, saving to purchase an income at retirement was the lowest priority for them on a list that included funding funeral cover, saving for a home, saving for education, saving for emergencies and saving to launch a second career or purchase an asset1.
What we recognised through that exercise was that if we wanted individuals to engage with long-term savings for retirement, we needed to first help them address their day-to-day financial funding needs. In fact, we recognised they would save more through their benefit schemes if they had some control over how those savings could be allocated to issues relevant to them and their families over the course of their lives.
Benefits Barometer 2016: 'Benefits models fit for South Africa' showed that by expanding an employer’s benefits platform to address a range of savings objectives such as emergency savings, housing funding, educational funding, medical funding and asset funding alongside retirement funding, we could effectively convert the employer’s retirement scheme into a guided financial planning tool for all employees. This edition, we believe we need to take that model even further if we want to achieve that relevance.
The insight here is that the more customised an employee benefit can be, the more it is likely to attract the attention and acceptance of the employee. On the positive side, technology has now taken us to the point that such ideas are finally conceivable.
But how seriously would HR departments consider such a bold move forward?
Ironically, perhaps the greatest impediment to changing the current conventions around employee benefits is HR departments themselves. Consider how HR departments typically determine what they should offer employees. On one level, government tax policy tends to define the scope of benefits employers consider offering. On another, annual studies such as Benefits Barometer and other benchmarking publications play a role in defining our thinking about what an employer is likely to offer as a benefit. So, most HR departments will start the process by finding out what competitors are offering by way of salaries and additional benefits. A game then ensues between the industry players, where the challenge is to determine how expansive an employer needs to be on salaries and benefits to attract talent, without introducing an uncompetitive drag on earnings. This is where benchmarking exercises can become a deterrent to finding creative solutions.
To change this convention, employers would need to believe that an alternative model would be worth the effort:
More importantly, employers would need to appreciate the merits of greater transparency around the value of compensation packages, including benefits.
Consider this interesting insight: South Africa is one of the only countries in the world to offer a total cost to company in their employee contracts. At the top of the contract is a number that shows what the employer is prepared to pay to the employee. The bottom line shows the employee’s take-home pay after tax and the cost of whatever benefits the company deems mandatory (medical aid, retirement savings, risk benefits). It also takes into account the impact of the employee’s decisions about pensionable pay, risk pay, contribution rates, medical aid plan, investment portfolio and risk cover.
The positive aspect of the total cost to company form of contracting is that it clearly shows what the employer believes is appropriate as a bundled array of protections for the employee. The negative aspect of this form of contracting is that it clearly shows what the employer believes is appropriate ... but does not allow for much variation to accommodate the substantial differences in individual and family needs in South Africa.
Getting employees to change the way they engage with their benefits requires that we create a total reward framework that allows employees to understand the value-add of any benefit offering now and in the long term.
Getting HR departments to seriously consider these types of radical shifts in policy will demand significant hand-holding based on substantive data analysis. This, of course, is where we believe we come in!
Getting employees to engage with benefits requires a total reward framework that shows the value-add of any benefit offering.
How could we make employee benefits a true win-win for both employers and employees? Last year we argued that we could plausibly transform retirement funds into a guided financial planning framework to address a family’s complete funding and risk protection needs. This year, we think we can stretch employee benefits that much further, transforming the benefits framework into a life-planning tool.
This would be a life-planning tool for a very different type of employee. Transformation and diversity will introduce very different priorities into any discussion about what makes a benefit attractive. The new organisational models for creating flexibility and rapid responsiveness to fast-changing competitive pressures will mean the traditional hierarchical model for organising and rewarding employees on the basis of ‘years of experience’ will likely fall away. Many companies will derive greater efficiency and productivity through the continual formation and re-formation of project-based teams in which hierarchical roles will effectively be meaningless. The greatest value may not come from the most senior team member.
Ultimately, the issue of age or seniority will be replaced by an assessment of the contribution the team member could potentially make. Lifestyle decision-making based on whether an individual has reached some arbitrarily decreed retirement date will fall away. Increasingly, we are likely to see employees flit from one job to the next, one company to the next, and perhaps even one gig to the next. The benefits model of the future could well sit outside a specific employer and take the form of a contract between the service supplier and the employee, much as many medical aid schemes now operate.
Individualised employee benefits: overcoming the dangers of stereotyping
Leading HR specialists such as Mercer2 recommend that if companies want to take advantage of the benefits they believe can be gleaned from individualised solutions, the whole process of benefit creation needs to be changed. We have already set out two important elements in that process: a commitment to co-creation, employer and employee together, and a recognition of the value of data analytics. Let’s see how we can combine these two to create a more effective process.
Rather than delineating the workforce by gender, age, ethnicity and salary level, we took a leaf from market research and identified a range of personas that best reflect the employment population.
Personas are characters or people prototypes constructed to capture the essence of different personalities that might be found in the workplace. They add richness to any discussion of employee needs because they capture the essence of that individual’s values, aspirations and emotional needs in addition to demographic characteristics: in other words, their hopes, dreams and constraints. The traditional way that personas are used is to determine which products a given persona is likely to buy. But here we expand the use of personas to flip that question around and test whether the benefits we have structured really address the hopes and needs of people who seem very much like our employees.
When we considered the full range of members covered in the pension funds administered by Alexander Forbes, for example, we developed more than 11 personas. These personas captured gender, age, ethnicity, salary level, job type, family or other obligations, education, living arrangements, computer literacy, values and beliefs, and a broad range of other considerations. Each one of these persona elements provided important insights into how the individual might value a benefit on offer: what would attract them to an offering? What might repel them?
Then we asked how we could group our array of benefits into categories that we felt captured the types of needs all individuals might be interested in addressing:
Finally, under each group of benefits we identified the types of services that could be offered, and how these could be funded (see Table 2).
The main objective here is to identify an array of services that add value to employees’ lives without necessarily adding cost to the employer, either explicitly or because it creates an additional servicing demand on the company’s HR resources. At the heart of this platform model is an array of outsourced services aggregated and administered by the benefits provider.
Note that no industry, employer or employee will necessarily need the full complement of offerings. We include them here to illustrate how rich the offering could be. What’s needed here is simply the platform on which the array can be aggregated, administered and reported on for each member.
Taken to its logical conclusion, such a platform should also be able to accommodate employees who are under full-time employment or contract, independent, and even post-employment.
The main objective here is to identify an array of services that add value to employees’ lives without necessarily adding cost to the employer, either explicitly or because it creates an additional servicing demand on the company’s HR resources.
These customised solutions will only gain attractiveness to the employee if, as we’ve said, we can continually show them the value of what they have, both today and into the future. Consider this sort of reporting as a hybrid of a total rewards report and a projection statement. Employees should receive this statement each time they receive their payslip to keep reinforcing the message and to provide nudges, when appropriate, for them to rethink these benefits when lifechange markers are met.
Such trigger points would be:
For every decision that incorporates an automatic savings device or an additional contribution, projections should be provided and updated to reflect the present value of that future savings potential on an inflationadjusted basis, up to a predetermined point. The power of compounding is best illustrated in a projection picture.
For every decision that represents the purchase of a form of protection or insurance, investors must be able to see the likely monetary value of that decision should the crisis occur.
Presenting all of this information in a meaningful way so people can see where they are in terms of their financial journey, where they are going, and why, would show that it’s worth their while to stick with their journey. This is the real value of reporting.
Customised solutions will be attractive to employees only if we can continually show them the value of what they have – now and in the future.
We believe it’s time to rethink this dynamic. Despite a rapidly changing workforce that may have less allegiance to a single employer for any prolonged period, there is still significant value in offering employees a customisable, and potentially even portable, array of benefits that serve first and foremost as a means to keep employees engaged, focused, stable and productive. The issue is less about using employee benefits as a point of corporate differentiation (although this will probably be true until this model of portable employee benefits becomes more mainstream) and more about using employee benefits to ensure the overall well-being of the individual worker.
Achieving this requires us to:
We believe not only that this could be done but that if companies are going to meet the competitive challenge of the rapidly changing work world, then the traditional model of compensation and benefits must change.
Consider what we have reflected on in this study up to this point:
In this rapidly changing world of work, it’s not about whether employers have a responsibility to provide these benefits to employees. Rather, it’s about why this is becoming an non-negotiable for employers who want to be competitive and attract the best talent.
1 Benefits Barometer 2016 Part 1: Chapter 5. pp. 61–78.
2 Mercer. 2015. The future of HR.