Unless HR has a compelling story when trying to introduce new benefits, it will be unlikely to interest finance directors. Emma Page reports.
When it comes to introducing a new benefit, research shows there is often little dialogue between HR and finance departments until the approval stage. Some HR professionals think that this is how it should be; that they should be trusted to choose the right benefits from the right providers and only approach the financial director (FD) for sign off. Tim Powell, a national account manager at Unum, disagrees: "If finance is leading the strategy for your company, how will HR know what returns they are looking for unless there is a dialogue between the two departments? Finance has to know what benefits are on the market, what competitors offer and which fit with the company's strategy.
"At review meetings I always meet with HR, but it would be hugely useful to sit down with the FD to get an understanding of the company strategy. For example, if a pharmaceutical manufacturing company saw greater returns in research and development and decided to focus on this area of the business, the benchmarking with peer organisations would change, as would the staff profile.
"The profile of risk would also change: maybe there would be a shift away from claims for musculoskeletal disorders towards a growth in claims for stress-related problems, when there are targets to meet for the development of new products. From an insurer's perspective there would be plan and cost implications."
Chartered Institute of Personnel and Development (CIPD) reward and performance adviser Charles Cotton agrees that HR should talk to finance about business objectives and how to support them in terms of rewards. "What is the FD trying to achieve in terms of sales, profit and market share? How can we recognise the values and behaviours that we want to attract and retain in our staff with salaries and benefits? Does a particular benefit support sales generation? Does another attract a certain group of skills? Maybe a wellness benefit like group income protection (GIP) helps to achieve branding or corporate social responsibility objectives."
According to research carried out by Financial Director magazine, on behalf of Unum, FDs are not working with HR staff when it comes to benefits decisions. More than 800 financial management staff, including FDs and chief financial officers (CFOs) completed the survey. One respondent in five said that they didn't liaise with HR at all over benefits, and a further 27% admitted to only "limited" interaction. Half said that they spent less than three days per year on benefits decisions and three-quarters said that they had not reviewed their employee benefits in the last three years.
GIP, which pays a proportion of a person's salary if they leave work due to illness or injury, is particularly misunderstood. One FD in 10 admitted to not knowing what it is and almost 40% believe wrongly that it pays out if employees are made redundant. Although almost a quarter said that GIP was a direct benefit to their companies as employers, 74% did not provide it. One-fifth of these said that the reason was a lack of awareness among management and HR and nearly half (48%) thought that it was too expensive to set up or maintain.
"I think the main reason they don't understand it is because benefits aren't presented in any other format than the 'the price has gone up'," explains Tobin Murphy-Coles, commercial director of Lorica Employee Benefits. "They only see the commodity, as opposed to them being a risk management tool. In my experience, some are really engaged and totally understand value. Others are distant from the human resources director (HRD) or compensation and benefits; there may even be a FD in between them too.
"There needs to be an up-skilling in HR on how to present financials to CFOs. For instance, on how to present budgets showing the impact of tax relief on tax-efficient benefits, showing how the cost of acquiring a platform like flex can be offset below the bottom line on a balance sheet. In my experience, HRDs are not always good at presenting the detail in a way a CFO could interpret it. I don't think, however, the HRD is at fault. A finger should be wagged at the consultancy market as they need to help create the relevant information to present to the CFO."
Making the business case
When it comes to presenting a wellness benefit like income protection to finance, Carl Chapman, health and risk consultant at Bluefin, urges HR managers to arm themselves with as much company data on absenteeism and presenteeism as possible.
"FDs understandably look at GIP and other benefits from a cost perspective; therefore, to approach the communication aspect effectively, return on investment should be used," he explains. "The ROI (return on investment) will be different for the various benefits, with some affecting staff retention and staff attraction and others having an effect on the overall costs of absence and presenteeism in the business. To be able to evidence past, and predict future ROI is, in my opinion, the best way to communicate the effectiveness of benefits to a financial director."
A calculator that will tell you if it's worth investing in a number of wellness benefits can now be downloaded from the Department for Work and Pensions website. "This is very useful," explains Katherine Moxham, spokesperson for the group risk industry group GriD. "It's an improvement on the tools that preceded it and worth taking a look at. But you do have to take the time to calculate your absolute costs accurately beforehand for the figures to be meaningful."
Moxham says that communicating ROI on GIP can be a real challenge. "After you've bought it, it's easy to see how it has improved absenteeism but beforehand it can be a leap of faith."
Tim Powell agrees. "We also have an ROI calculator for GIP. You can work out an employer's direct and indirect absence costs and overlay the income they would receive from a GIP scheme quite easily. Interestingly, the CIPD places the indirect costs of absence, such as low morale and reduced productivity, at 78% of direct costs. Obviously, if an employer says that they don't have to pay any type of sick pay beyond six months, the scheme is going to cost. But, in reality, would they stick to that? Who would set a valued member of staff adrift if they were ill?
"The best approach may be to list all the add-ons that you get with income protection and compare the cost with what you're paying already, for HR advice, employee assistance programme (EAP) counselling and so on," adds Moxham. "Generally you'll be making a saving. From that you can demonstrate good value and say that you've improved absence rates by x%. I recall a large employer balking at a cost of £150,000 for a GIP scheme, until it realised that the £120,000 it was spending on EAP was no longer necessary."
A comprehensive GIP scheme will cost around £300 per employee per year, but there is a raft of more basic propositions on the market: products that only pay out for a limited period for example, or that pay 60% of an individual's salary.
"It's a competitive industry," says Moxham. "Often a GIP provider will reduce your premium in anticipation of improving on your absence figures. They'll put their money where their mouths are so to speak, so if you sit down with them and talk through your processes, health and safety procedures and utilisation figures, anything you are doing well will be taken into account when it comes to calculating your premium."
Early absence notifications will usually win an employer a reduction in premiums, on top of early rehabilitation interventions that can return an employee to work quickly. US internet consultancy CSC extended income protection to its entire 8,000 UK staff in 2005, to offset a reduction in the ill health cover element of its pensions. Over the past six years, the company has seen a 42% reduction in its premiums, and the number of people off sick for more than six months has fallen by 46%.
If you have a set of benefits that help retain staff, then that has a value that any CFO will understand, says Tobin Murphy-Coles. "CFOs understand the value of employee benefits if the valuation is monetary. They understand the process, for instance, the ROI of health benefits showing a decrease in sickness absence. I'm not sure they totally understand the benefits if the valuation is something less tangible, perhaps if the benefit is retaining a staff member rather than recruiting a new one. So for instance, if someone has been in a production line for ten years, how long does it take for a new member of staff to become 100% efficient?
"Any good CFO will know that a relevant business plan is predicated on having talent in the workplace, in attendance all the time. Benefits fall into two areas. They impact on risk management – so things like health insurance and income protection to manage a client's exposure to absence and absence costs. Plus they are an attracter or retainer, helping to cut the costs of losing talent. If benefits aren't attracting talent in, and then they've not got employees there as much of the time as possible, the business plan will fail – no matter how good it is. So given that, why wouldn't a CFO try to understand benefits in detail?"