Here's how to minimize employee turnover without increasing compensation and benefits spending.
For employees at most companies, the news on the compensation and benefits front has been pretty dis-mal for the past few years. Signif-icant salary increases have been almost nonexistent, and benefits packages have shrunk as employers, struggling to contain benefit cost increases, have shifted a portion of those expenses to their workforce.
This difficult rewards environment has stretched workers' loyalty to the breaking point, and companies may find themselves facing a wave of turnover as the economy recovers. "Turnover will double this year from 2003," predicts Peter LeBlanc, senior vice president of New York City-based human capital advisory firm Sibson Consulting. "After three years of layoffs, more work for no more money, little or no pay increases, and no bonuses, at some point employees are going to be ready to take their chances with a new employer."
That spells big expenditures for many businesses. Turnover is always costly, but it's particularly expensive when a company loses its most productive employees. And those workers may be the hardest to please in today's environment. In the 2003 Rewards of Work survey of more than 1,000 full-time corporate employees conducted by Sibson Consulting and WorldatWork, respondents who described themselves as high performers rated their company's overall rewards package significantly lower than other employees did.
What can CFOs do to shield their organization from this looming turnover tsunami? The pressure on benefits and compensation costs shows no signs of dissipating soon, so finance executives must ensure that their company gains maximum advantage from every aspect of the rewards it already offers as well as any new ones it may be able to add.
More and more companies are turning to a total rewards approach: They're developing a comprehensive, integrated view of the value proposition they offer their workers, and they're taking action to communicate that value to a restless employee population. A total rewards program helps the organization leverage its human resources expenditures for maximum strategic advantage, and it provides a decisive edge in the battle to attract and retain talent.
Integrating Work Experience
A comprehensive total rewards program must bring to employees' attention every reward the company provides to its workforce. That includes compensation and benefits, of course, but it also encompasses a third element that Raoul Choos, direc-tor of Pittsburgh-based consulting firm Mellon Human Resources & Investor Solutions, calls "work experience." This category includes a variety of designed benefits such as work/life programs, flexible work arrangements and training, as well as less tangible rewards such as engaging work content, career development opportunities and potential for advancement.
Work experience is often overlooked; even companies that have implemented a total rewards program sometimes define their rewards package as consisting only of compensation and benefits. But organizations that ignore work experience are losing an opportunity to leverage an array of extras that have high value for employees. "Companies get caught up in compensation and benefits, but work experience is a key differentiator in driving business performance," says Choos.
For some organizations, perhaps, work experience seems too insubstantial to be part of the rewards equation. But consider this: The Sibson Consulting/WorldatWork study found that dissatisfaction with their work content is the number-one reason employees leave a company.
Work experience interacts with the other two components of the total rewards program and directly impacts the organization's human capital costs. "The degree to which companies are strong or weak on work content relates to how much they have to spend on compensation and benefits" to remain competitive in the labor market, points out LeBlanc. "Companies that are short on work content have to make up for it with things like higher pay or richer benefits."
Taming Turnover
Denver-based health-care provider HCA-HealthOne LLC sees work experience as a key element of its total rewards program. "We've spent time integrating all three components, even though a lot of companies just look at compensation and benefits," says Courtney Sherwin, director of total compensation. "We know that a lot of employees leave the organization because of work experience issues. Although this aspect of total rewards is less tangible, it's still extremely meaningful to employees."
For many organizations in the health-care industry, reducing turnover is a crucial goal. The market for medical staff -- particularly nurses -- is fiercely competitive, and replacing these highly trained employees is an expensive proposition. HCA-HealthOne estimates turnover cost per employee as approximately equal to the worker's annual salary. That amount covers lost productivity; orientation time for the replacement; temporary contract labor costs, if needed; referral and sign-on bonuses; and relocation and training expenses.
"Our main goal for total rewards is to attract and retain employees and to fill vacant positions more quickly," says Sherwin. "Our cost of turnover is extremely high, so we can realize a huge return by emphasizing retention."
HCA-HealthOne's overall benefits have not changed dramatically since it adopted the total rewards philosophy. But the new approach helps the organization do a better job of communicating the value of the various elements of its rewards program to its workforce. HCA-HealthOne now provides its employees with annual total rewards statements that list the dollar value of every component of their compensation -- including base pay, premium pay and bonuses -- as well as their medical, dental, life insurance and retirement benefits.
Along with these annual statements, HCA-HealthOne provides a list of the work experience programs it offers. Exit survey data indicates that many employees leave because they have difficulty balancing the demands of their work life and their private lives, so the organization places a high priority on programs that help its workers achieve that balance. "We are delving into the reasons why employees leave and finding ways to fix those problems," says Sherwin.
HCA-HealthOne's menu of work experience offer-ings is extensive. In addi-tion to work/life counseling resources and various programs designed to enhance workers' relationships with managers and co-workers, the organization provides a concierge service that runs errands for employees while they are at work. Its hospital cafeterias prepare meals that workers can take home. Plus, many of HCA-HealthOne's employees are young parents who appreciate the organization's unique flexible work scheduling program, which lets them work for nine weeks and then take three weeks off in parallel with the local school district's class schedule.
Winning the Talent Competition
HCA-HealthOne trains its managers to leverage the total rewards program to attract new talent. "Candidates start seeing total rewards even before they start working here," notes Sherwin. "They can use this information to evaluate and compare different job offers." The company provides its managers with generic total rewards statements they can use when discussing salary and benefits with prospective employees. Managers can customize the generic statement to give the applicant a sense of the total value of the organization's offer.
In addition, employees can access an online database that enables them to create their own total rewards statements. If a worker receives an offer of employment from another company and decides to accept it, HCA-HealthOne's managers can use the total rewards information to structure a counteroffer and try to reverse that decision.
Communication is key to ensuring that employees fully understand the value of what they're getting out of their deal with the organization. "Employees may be making $15 an hour, but they forget that they are getting all these other things in addition to compensation and benefits," Sherwin points out. "A lot of this comes down to communication and training. We need to do a better job communicating about what we already did and our plans to add exciting benefits."
Where To Start
Companies setting out on the total rewards path should start by developing a solid understanding of what employees value. "If rewards feature things that people don't value, employee satisfaction can suffer, and so can the company's management efforts," notes Scott Olsen, a principal with New York City-based PricewaterhouseCoopers HR Services and head of that firm's compensation practice. "This is not about spending more money, but about spending money more effectively," he adds.
Organizations should strive to articulate a total rewards package that reflects the unique value proposition they offer their employees. They should avoid simply emulating other companies' rewards package. In the late 1990s, Olsen notes, many businesses allocated a large portion of their rewards spending to stock options simply because other companies -- notably those in the high-tech industry -- did so.
"Many companies ignored a lot of the reasons why they attract people," Olsen recalls. "It is important that companies don't try to be something they are not [when structuring their total rewards program]." As the FASB moves closer to requiring businesses to expense stock options, organizations need to think carefully about whether employees value that reward highly enough to justify its cost.
Focus groups, employee surveys, exit interviews and manager feedback are all useful tools in determining which rewards to offer. "You can't run the business using ad hoc one-liners," notes LeBlanc. "Companies need to gather this information routinely using strong, standardized questions."
Once the organization has compiled sufficient data to construct a baseline for its total rewards program, it can conduct a gap analysis to identify any divergence between its current offerings and its employees' needs and expectations. And it should emphasize its work experience rewards to make up for any shortcomings that it can't directly fix. For example, if a company can compete only by paying its workers at the median, it can supple-ment its employees' financial rewards by implementing programs that generate goodwill -- such as flexible work scheduling and convenience services -- and by taking steps to ensure that employees' overall experience of their job is fulfilling.
These rewards don't cost a lot of money, but they can help businesses attract and retain talent more effectively. "When a company is at a disadvantage when it comes to compensation and benefits, the smart thing is to perform better on other things," notes LeBlanc.
At the same time, HR decision-makers need to keep in mind that performing better brings few benefits when a company's communication lags -- and in many businesses, communication problems deflate the total rewards program's influence.
A survey of employees at 160 Fortune 1000 companies conducted by Mellon Human Resources & Investor Solutions found that 61 percent of organizations offer a total rewards program that encompasses compensation, benefits and work experience. However, when asked what their company's total rewards program included, only 31 percent of respondents in those organizations named all three components. Most employees perceived total rewards as consisting only of compensation, or compensation and benefits.
Companies with total rewards programs need to follow HCA-HealthOne's lead and invest resources in their program's employee outreach activities. "Total rewards is as much about communication as program design," notes Olsen. "You have to make sure you are telling the story effectively."