As we approach 2020, businesses are more concerned than ever with being scaled and built for profitability. Teams are leaner than ever, superstar talent carry greater workloads, and businesses that aren’t built for sustained growth are disappearing fast.
In that quest to trim the fat, controlling employee benefit overspend should be a major goal for all growing businesses. Even with responsibly scaled salaries, employee benefit offerings that aren’t well-selected can cause an organization’s compensation costs to balloon, significantly eating into opportunities for profitability.
Moving forward, we’ll explore:
- How benefit overspend can happen to any organization
- Why monitoring benefit overspend is especially relevant for growing organizations
- How to understand which benefits are actually beneficial
- How to bring finance, HR, and senior leadership together to make benefits work for everyone
Why Benefit Overspend is Such a Common Problem
Employee compensation is one an organization’s strongest tools when it comes to talent acquisition and retention. That means that the quality and value of your benefits program is indeed crucial to building a great team that’s fit, happy, and productive.
Unfortunately, however, scaling and aligning those benefit offerings is a complex task. In fact, compensation plan design is probably one of the most difficult tasks HR has to manage. That intimidation factor, paired with the fact that human resources professionals don’t always have the background in finance they need to correlate the direct connection between employee benefits compensation and the bottom line, is why benefit overspend happens in so many organizations.
More is Better, Right?
The biggest mistake businesses (especially new businesses) make when they design a benefits plan is trying to include every form of inclusive coverage and access to any valuable program. In the increasingly competitive war for talent, that kind of an approach can be attractive at face value, but year-to-year, it can become a burdensome anchor on business profitability.
Both benefits professionals and individual consumers frequently make the mistake of assuming benefits are like a stockpile of food for emergencies: it’s maintained in case you need it and provides peace of mind, but it’s not a part of your daily, weekly, or monthly life. If that’s your paradigm, then of course you’re going to assume more is better.
Here’s the truth, though: Impactful benefits programs aren’t the emergency food in the basement; they’re the dry and canned food in the pantry – they’re there for use in a pinch day-to-day. True “benefits” are the offerings that provide value, security, and convenience to employees’ and their families’ everyday lives.
Once you understand that, it quickly becomes clear that bigger isn’t better; usefulness and accessibility improve benefits programs.
Over-Emphasis on Industry Competition
One of the most common ways new or growing businesses fall into benefit over-spend is over-reliance on industry benchmarks to help guide their benefit plan design. While benchmarking is a great tool to help you understand and plan relatively fixed expenses like base salary, benefits packages must be scaled to the individual business and workforce.
Without an incredibly deep and granular understanding of your competition or goal competition’s complete financial picture, you can’t reasonably predict that their employee benefit practices will translate to success in your organization.
Studying the competition’s benefit offerings certainly has value and can inform your planning, but if it’s the main guiding light for your benefits program, you’re making the classic mistake of focusing on the competition rather than yourself. Finance, HR, and overall leadership must work together to articulate a vision of the business, its blueprint for success, and how benefits can be scaled to make that happen.
Lack of Understanding Means Lack of Alignment
Another classic mistake businesses of every size and sector make is that they create their benefits plans for a hypothetical team of theoretical employees instead of letting the real needs of their actual employees shape the process. While that can be quite difficult at outset, after a year or two of benefit program usage, you should have enough data available to create a rich understanding of what people within your organization need to build that daily health and security we’ve discussed.
If you’re not working to optimize your offerings to what people actually use, you’re likely creating or fostering overspend. At the same time, however, your benefits program must also answer and scale to finance goals. In just a minute, we’ll explore how you can leverage HR and finance help create that alignment.
Why Benefit Overspend is a Potential Pitfall for Growing Businesses
Early-stage businesses are incredibly dynamic, but that also means there is the potential for vulnerability. A disappointing quarter or behind-schedule development project can quickly erode a business’ profitability, and without the secure cash holdings of an established company, bloated employee benefits spend can turn into a big red number for a given financial term.
In order for an organization to grow continuously, with an expanding staff and increasingly complex human capital structure, an employee benefits program must account for not just costs at the program’s launch but of the way those costs might balloon, expand, or creep as the company grows. That means benefits plans aren’t just about the design that will land talent right now, they must be plugged into and built with short- and long-term financial and organizational plans in mind.
When benefits are well-scaled and well-aligned, they support an organization’s internal team, maximizing their ability to do great work while also maximizing the organization’s chances for profit as well as their ability to make informed financial projections. Finance leaders, HR leaders, and CEOs must come together to create that robust, clear vision, or they’re not really thinking about or planning for growth.
Defining “Benefit” in a Way that Makes Sense for Everyone
Increasingly, employers and employees alike are aware of the fact that employee benefits are actually an opportunity to create mutual benefit. The old way of thinking was that businesses offered benefits to be competitive and benevolent. Now, however, the cards are on the table, and people understand that part of the benefits game is keeping employees present and productive.
That doesn’t mean the pendulum has swung back and benefit plan design can be all about making the books look good, however. Medical care, prescription drugs, and hospital visits are only increasing in cost, and more people than ever have complex, potentially expensive medical needs.
Creating an approach to benefits that works for everybody and supports growth truly requires finding a balance between the needs of the actual people within your organization and the financial needs of the organization as a business. You can’t serve either purpose exclusively and expect to solve the problem in a satisfying way; both sets of values must be accounted for.
Understanding What People Really Need
As we’ve said before, one of the best ways to understand your actual organizational healthcare/benefit needs is to understand your employees’ actual healthcare/benefit needs. There are two main ways to do this: by asking them using surveys or other tools or by reviewing your carrier’s usage reports. The best approach involves using and weighing both.
Too often, employers are scared to talk to their team members about benefits because they’re scared all they’ll hear is that the programs aren’t good enough. While there’s sure to be a certain degree of that feedback, the discussion can also provide the best-possible understanding of what people actually want, need, and value. If you can get the buy-in you need to build an authentic data set, a lot of your most important questions can be answered for you definitively.
Those usage reports from your carrier will fill in the quantitative data to help you understand which offerings are most accessible and well-used (which, remember, means “valuable”). You can also build a very strong understanding of where the dead weight in your benefits program might be.
Understanding What the Business Can Bear
Once you have a strong grasp on your human needs, the next step is to determine what kinds of plans and packages your organization can reasonably offer. Obviously, the goal is to create packages that deliver consistent, satisfying offerings while still leaving yourself the best chance to predict and achieve business growth.
If identifying and eliminating overspend is your primary goal, this is really the most important point in the process. HR needs a clear picture of the finance goals so that they can create plans accordingly. At the same time, finance requires HR’s understanding of day-to-day employee needs in order to do their work in an accurate manner. Bringing those two data sets and approaches together can seem incredibly challenging at first, but it’s actually your best chance to get benefits right in a way that works for everyone.
Embracing the Push-Pull
The intersection of HR and finance can be tricky to navigate because both sets of professionals come from very different backgrounds and come equipped with what some might say are competing sets of values. With that said, they share the most important common ground of all: they’re responsible for setting up operations for success.
Getting your employees the benefits they need while keeping the business lean and scaled for profit and growth is a tall task, and frankly, no one person can make it happen. It takes a major commitment from leadership and a willingness between finance and HR to work together, plan together, and commit to seeing things through each other’s lenses (at least some of the time).
When your organization can articulate an approach that makes HR, finance, and the executive suite or boardroom happy at the same, that’s how you know you’re onto something really great.
Employee benefit overspend is rampant across business, and part of the problem is that many organizations don’t understanding how or why their approach to benefits isn’t aligned with their employees’ needs or business goals. In order to create impactful benefits packages that delight your team and drive business, it’s important to remember:
- More is not better when it comes to benefits because overspend can be devastating to potential profitability
- In early-stage or growing businesses, benefit overspend can be especially damaging
- Overspend usually happens because organizations either lack a strong understanding of employees’ actual needs or feel the need to offer exhaustive benefits in the name of competition
- To truly be “beneficial,” offerings must be impactful and see actual use
- When it comes to determining which benefits are actually essential, ground-level employees (and their usage data) are your best resource
- Part of getting benefits right is learning to manage the dance between humanistic priorities and business priorities