Increased Pay vs. the Increased Value of Benefits

Friday, November 02, 2012

Many years ago, employee benefits were often referred to as “fringe” benefits, this moniker was attributed to the relative minor role of benefits compared to direct pay. Until the last several decades, employee benefits played a relatively small, although important role in the human resource management scheme of employers. The overwhelming focus was on employee cash compensation. Until the 1970’s, expansive and inclusive benefit programs were generally relegated to very large private and public organizations as well as unionized employers.

However, as a new generation of workers began to enter the workforce, they demanded and employers responded with expanded programs including dental and vision care, EAP’s, savings programs, additional time off, … etc. Employees wanted flexibility, employers saw tools to attract, retain, and motivate workers. Employers saw benefit programs as a relatively inexpensive way to differentiate themselves from other organizations. Nevertheless, economic and competitive forces being what they are; many companies’ benefit programs began to look very similar to each other.

In an October 19, 2012 article in USA TODAY, Dennis Cauchon quoted analysis from the Bureau of Economic Analysis', reporting that 2011 workers’ total compensation rose 19.7% on the basis of employer-paid benefits. This increase is in direct opposition to direct pay which reportedly rose 1.4% in 2011. Workers have become accustomed to annual pay increases in the 1%-3% range during the most recent recession.

The concepts of total rewards, total compensation, and total remuneration emerged out of an effort by employers to help employees appreciate the complete value associated with employment with a given organization. It certainly includes both direct pay and traditional benefits such as health care and retirement as well as non-monetary accolades. But, it also includes the value connected with working for well respected employers; employment with organizations which the employee perceives adds value to society, career development and advancement opportunities, and the employee’s ability to achieve a work-life balance with an organization.

Cauchon points out that the BEA analysis identifies: health insurance, retirement benefits and employer Social Security and Medicare contributions as the three largest expenditures for organizations. This is hardly a surprise to anyone, since we are in the midst of a national debate over health care, retirement benefits, entitlement system funding for an aging population. Nor is this debate unique to this nation; virtually every industrialized nation has or is dealing with the same issues of how to provide for their public and private social welfare systems.

Whether an employee perceives enriched benefit programs have more or less value than direct cash compensation is relative to the employee’s personal situation. That is why many benefit programs provide greater value based on an employee’s marital status, years of service, and number of covered dependents. A retirement program which projects a post-employment income replacement of 70% may have very little value to a 21 year old as opposed to an employee 5 years away from retirement. Furthermore, employers with rigid total reward may find it difficult to attract and retain the desired talent if for no other reason than competitors provide a higher degree of flexibility.