Risk Management

What’s the ROI for Your Benefits?

With senior financial executives seeking tighter budgets, consultants look to quantify the costs and rewards of offering employee benefits.
David KatzMarch 22, 2001

Not long ago, calculating the return on investment (ROI) for your employee benefit plan might have been a normal activity—if you were the CFO of a company domiciled on Mars.

Benefits, after all, have long been considered a “soft,” unquantifiable area.

To be sure, everyone knew that benefits produced positive results. It stood to reason that providing health coverage made employees less likely to be absent and that pensions reduced their worries and made them less likely to roam.

While the health-care and pension costs could be calculated, however, the measurable benefits of benefits remained vague. That math-free environment was reinforced by the fact that human resources people tended to the warm and fuzzy side of things.

Matters grew worse, from the point of view of hardheaded financial managers, during the late-1990’s tight labor market. Suddenly, the cost of providing benefits seemed less important than the need to lure and hold onto talent.

While competition for workers remains strong in certain sectors, however, the daily barrage of layoff reports seems to have swung the power pendulum away from employees and back to employers.

Employers will likely soon focus more on cost than on retention. Sensing a way to capitalize, benefits consultants are offering ROI- calculation tools aimed at “hardening” benefits into something quantifiable.

For instance, The Segal Co., a New York City-based benefits consulting firm, is offering clients a proprietary spreadsheet software application called the ROI Calculator. The calculator’s purpose is to help employers gauge the value of non-traditional, “work-life” benefits, including flexible work arrangements, parental leave, concierge services, and wellness programs, according to a draft of a Segal publication obtained by CFO.com.

The calculator assigns separate dollar values to time saved, improved productivity, reduced absenteeism, increased employee retention, and reduced health and disability costs for individual benefits. It then determines the ROI for each benefit.

Using sets of data, like an organization’s compensation cost, annual revenue, and benefit uses, the tool also accounts for average hours worked per week, average unscheduled absences, turnover rate, and other factors. If an employer doesn’t have data available, the ROI Calculator uses national averages, Segal says.

Similarly, Aon Group is offering an “absence-cost estimator” and a “turnover-cost estimator” to set baseline costs to establish an ROI for offering certain benefits. The absence-cost tool accounts for workers’ compensation costs, salary continuation, short-term and long- term disability expenses, and other costs, says Cynthia M. Keaveney, a senior vice president and national practice leader for Aon Workforce Strategies in Conshohocken, Pa.

The turnover-cost tool incorporates such costs as those incurred in firing employees, training and supervising new ones; headhunting; and lost productivity. The turnover and absence figures, taken together, yield a benefit for providing the new perk.

From that, employers can subtract such items as the costs of changing internal processes and the expense of the new benefit to arrive at an ROI figure, Keaveney says.

Overall, the emphasis on justifying the cost of benefits seems a sign of belt-tightening times to come. Yet in tandem with the new stress on costs, a strange thing has happened: Companies have found that they must become nicer.

A child of the recent boom, the concept of offering employees a cornucopia of non-standard benefits ranging from free coffee to child care to onsite child care to in-office hair styling has hung on into the current downturn.

Employers must now look to strike “a balance between lean and mean and lean and nice,” explains Richard F. Federico, a vice president with Segal in New York. “You have to continue to be nice,” he says, because workers now expect employers to act that way.

Federico, however, sees no contradiction between the emergence of non- traditional benefits and the new cost-consciousness. Offering employees the ability to plan wellness programs and shop for health services online via a portal like ProAct Technologies, for instance, is a cheap benefit that at the same time appeals to employees’ natural tendency to surf the Internet on the job.

Alternative work arrangements like telecommuting and flexible hours should also have increasing appeal. “You will always find flexible work arrangements high on the pecking order” of benefits valued by employees, Federico says. “Yet they’re low cost.”

The consultant also thinks that in certain cases, the answer to the question of whether to accommodate an employee with a slightly different work schedule than other workers should be a no-brainer.

Federico tells a story he heard about a skilled, mid-level engineer who asked his employer to change his hours from the standard 8-to-5 schedule to a 7:30-to-4:30 schedule he needed to better care for his child.

The employer turned the engineer down, perhaps in order to provide equal treatment to all employees, and the engineer quit. “That astounds me,” he says, adding that in situations like that, employers should be “getting away from the old paradigms.”

In an era when, as Federico jokes, 401(k)s are fast becoming “201(k)s” because of the plummeting stock market, employees will look to their employers to provide them with benefits like flexible work schedules. And many employers, having calculated a good ROI for a low-cost retention tool, will oblige them.