Where financial education fails, instilling good habits from the start often succeeds. This means that how we engage with our newest and youngest employees is critical. For most employers, young employees are valuable because of their desire to learn and grow, but they tend to leave before the employer can reap the full value of their investment. One way of fostering commitment is through the total rewards system. Historic benefit structures may no longer be appropriate for this generation of workers, who have a unique set of values and principles. Young workers who favour immediate gratification may not appreciate the importance of retirement savings and contributions for benefits such as medical scheme membership. A bit of paternalism may be precisely what is needed to shape the habits that an employee should have to become financially healthy.
Employees’ sense of financial well-being is closely linked to their engagement levels and organisational commitment. Much has been made of the fact that financial literacy lies at the root of getting individuals to take their own financial wellness and savings demands seriously. Getting people to do the right thing depends less on their understanding of the problem and more on developing good habits. An individual’s first job could be the best opportunity to get this reflexive mindset imprinted.
Getting this right demands that we have clarity about what employees want, as well as a deep appreciation for what employees actually need.
As discussed in 'Choice', people rarely make the right decisions to enhance their long-term welfare, so a bit of paternalism in the form of making sure that employees have what they need may well be in everyone’s best interest.
Young employees show particularly high rates of resignation from employment. Only older members who are resigning instead of retiring to access higher cash benefits show similarly high resignation rates.
But why are young workers showing so little organisational commitment?
Getting people to do the right thing depends less on their understanding of the problem and more on developing good habits.
Each generation brings its own value systems, codes of conduct and aspirations. Young workers have grown up in a very different political and social reality and have entered the workforce under decidedly different economic conditions. Partly due to these factors, they tend to value different things and have different aspirations and needs from those who manage them and design the total rewards systems1. There is a need to bridge this divide.
Ironically, the generation that young workers form has been dubbed the ‘connected generation’. Young people want to feel that they are connected, updated and involved1. The total rewards system and the education that underpins it should meet this need for connectivity. The incentives we offer should also convince them that what they need is really what they want.
For older generations, high school was often followed by university or some type of job that would give them the necessary skills to build a career. The same may not be true of Millenials, who are born after 1980, and are staying in school and at home longer and entering the workforce later2. The challenge for this new wave of employees is that in the continuing wake of the global financial crisis, even educated youngsters struggle to find permanent work. As profit margins are squeezed, employers are turning to informal and temporary worker3 of every age. While the lower costs of informal and temporary labour may prove attractive to many employers, the implications for young employees can be significant and can include lower wages, lower lifetime earnings potential, less training and lower retirement savings4.
In many ways, it’s no wonder that younger employees who are starting out in life may choose higher take-home pay instead of benefits. An employer might unwittingly try to accommodate aspirational spending or financial disengagement through decreasing employee benefits and increasing pay. Unfortunately, the long-term cost of this trade-off might be higher than both parties realise. Health and retirement benefits provide good examples of why and how young workers may not see the value in the employee benefits component of the total rewards system.
Workers might be given choices about which medical scheme option to take and whether to join a medical scheme at all. Very often, young employees will choose the cheapest cover. This is not entirely irrational. The graph below shows the claims over an individual’s lifetime in a medical scheme. In particular, young employees experience low claim levels relative to their older colleagues.
So, in many respects, younger workers need less medical cover than older employees, but late joiner penalties will apply. The likelihood of death and disability are also lower at younger ages.
People view their future self as a stranger to whom they are unwilling to give away their money.
Retirement benefits are particularly problematic as people many decades from retirement tend to favour immediate gratification5. And while it is possible for an individual to imagine themselves in a particular situation, post-retirement, for instance as the proud owner of a beach house in Clifton, it’s hard to imagine what you look like in that beach house. People are uncertain about what they will be like family circumstances and appearance can alter over the course of a lifetime to the extent that people view their future self as a stranger to whom they are unwilling to give away their money5.
So, if young workers don’t want benefits, what do they want?
According to Marston6, Millennials require flexibility in terms of working hours and location, variation in their job, continual feedback from supervisors, opportunities to learn and a work environment that presents problems they are required to solve. Further, Manning7 finds that young employees want to feel that they are valuable members of the workforce and that their opinions are respected. For this reason, a substantial part of the total rewards system for young workers includes elements apart from pay and employee benefits.
The issue of on-the-job training has particular relevance given the current economic climate. Any adult, employed or not, has two major assets: human capital and financial wealth8. Human capital is defined as the value of future labour earnings. For a young person, human capital is potentially enormous and far greater than financial wealth. However, young workers may choose to miss out on additional formal learning to enter the workforce quicker. This dynamic is driven partly by the fact that the employment rates of young employees are the most sensitive to the economic situation9. It may be up to the employer to provide training that young workers both want and need.
If the disability insurance arrangement had no younger workers participating, many older members may find the cost of this benefit unaffordable.
Employers cannot simply ignore how young workers view employee benefits. The lack of employee benefit coverage and low preference for these benefits among young workers can have repercussions throughout the rest of their lives.
Firstly, there is a lost opportunity for forming good habits around savings and responsible insurance arrangements. So, while a young worker may be learning that owning a vehicle means being responsible for its upkeep, so too should they be learning that earning a salary means having to provide for times when they can’t earn.
Secondly, there may be short- and longterm consequences for the young worker deferring participation in benefits. In the case of disability benefits, an accident either in or outside the workplace can leave young recruits without income support for the rest of their lives10.
n the case of medical schemes, regulations allow for penalties for late joiners, namely those who have not been members of medical schemes for two years immediately before applying for membership.
These may include:
A young employee who joins a medical scheme later in life faces higher costs at a time when it is likely that their personal circumstances, including family size, have already led to a higher cost of living. It may make sense for a young employee to take out more medical scheme cover than they need to avoid these penalties11.
Thirdly, there are consequences for workers who participate in employee benefit schemes if younger workers are conspicuous by their absence. Employee benefit schemes often allow for cross-subsidies between members, such that, in the case of disability benefits, younger members pay part of the cost of the benefits for older members who are more at risk of injury or ill-health. If the disability insurance arrangement had no younger workers participating, many older members may find the cost of this benefit unaffordable. If young and older workers remain covered by insurance arrangements their whole lives, the subsidies that they receive and give tend to cancel out. However, the system becomes unbalanced if one group opts out.
The current contribution rates to retirement funds are too low to secure a reasonable retirement income.
While we now know that younger employees will respond positively to non-financial benefits such as training, we know that they do not particularly want employee benefits such as retirement funds and risk cover, even though they need these benefits. So, how do we get younger workers to value employee benefits?
Use peer pressure
Although the choice of contribution rates to retirement funds is influenced by the extent to which these contributions are matched by the employer and the default options for the fund, they can also be influenced by the decisions made by colleagues and peers12. Part of this influence may be due to colleagues learning from each other, so the employer is presented with an opportunity to distribute information at a business level and thus ensure that all employees are well informed about benefits on offer.
A recent study showed that having young people view simulated, aged images of themselves made them feel more connected with their future selves and actually resulted in higher contribution rates13. The current contribution rates to retirement funds are too low to secure a reasonable retirement income and innovative solutions like this may assist.
Use social media
As discussed in our chapter on education, written communication may be ineffective. Alternative platforms that younger workers may find more appealing include social media14, short video clips and reality TV shows15.
Use integrated solutions
Employers must recognise the importance of creating a total rewards system that goes beyond pay and employee benefits. The package should include clear communication, that speaks to the brand of the organisation so that employees feel a sense of solidarity with their employers. This in turn builds organisational commitment.
On-the-job education and training should be combined with the remuneration package to create an employment experience that looks holistically at the needs of young workers.
Employers must think creatively to encourage contributions to voluntary benefit schemes, using technology that appeals to young workers. On-the-job education and training is imperative and should be a major focus of employers to ensure job satisfaction and engagement. This should be combined with the remuneration package to create an employment experience that looks holistically at the needs of young workers. Young members should be allowed limited choice as they may be influenced by their peer group and often employ a short-term view of their consumption requirements, discounting their future financial needs.
1 Reynolds et al (2008)
2 Manning (2011)
3 Sassen (1997)
4 Zimmerman, K, “Precarious New World of ‘informal’ Jobs”, Harvard Business Review Blog Network (8 November 2012)
5 Hershfield et al (2011)
6 Marston (2007)
7 Manning (2011)
8 Cambell & Viciera (2002)
9 Hanchane et al (Unpublished)
10 Gruber (Unpublished)
11 Medical Scheme Act, Act No 131 of 1998, as amended
12 Duflo & Saez (2002)
13 Hershfield et al (2011)
14 Towers Watson (2012)
15 Polak (2008)