Managing performance is vital if you’ve created great pensions and perks to stop your workforce bolting, says Peter White
Case study: The Football Association, Yahoo!
Article in full
Why are you introducing that splendid new benefits scheme?" asks the man with the quest for knowledge. "To aid recruitment and retention," replies the benefits chief with one eye on his clichÈ ridden crib sheet.
However, not only does this not do justice to the organisation introducing the glamorous array of insurance and discounted cars but it doesn’t give any idea of the areas that the benefits are actually expected to help with. More specific questions need to be asked: is the package designed to decrease staff turnover by a certain percentage or is it being aimed at a specific selection of the workforce? No doubt the board of directors wouldn’t have accepted a vague answer when listening to the business case.
There is a commonly held notion that employees do not leave employment because of their pay or benefits. They leave because they do not like their managers. They leave because they don’t like their working environment. They leave because they are unhappy with the career choice they have made or had forced upon them. They leave because they are offered a job that they perceive as being more important or more exciting. They do not leave because their employer does not offer a tax-efficient mobile phone salary sacrifice scheme.
Research recently compiled by the Cranfield School of Management highlights this. Its RCI report shows that organisations have the most trouble retaining staff at three levels: junior management, new graduates and clerical staff, none of which are used to, or expect, a particularly extravagant benefits package.
Dr Emma Parry, research fellow at Cranfield School of Management, explains: "Once you get to higher levels in an organisation, both that organisation and the individual have probably invested more in that relationship, that psychological contract, so they’re more likely to stay whereas at a graduate or clerical level there’s not that investment."
However, benefits could possibly play a part if that employee was in two minds about leaving, especially if he or she was currently involved in a benefits scheme that was unlikely to be offered elsewhere. "If you’re in a situation where you say ‘should I stay or should I go’ then you’d weigh up the pros and cons and the things in the benefits package and things like work-life balance are the things that are going to make a difference," says Parry.
Employee Benefits’ Benefits Research 2004 shows that 64% of employers believe benefits are an effective retention tool. Some benefits, dare it be said, could even be considered too much of an effective retention measure.
A final salary pension scheme, for instance, is becoming a rare treat. Clive Cripps, director of flexible benefits at consultancy firm Entegria, says: "If you’re benefits aware, a final salary pension scheme is going to make you very unlikely to want to move. As soon as you have [such a scheme], people now have to think very carefully when switching jobs."
Of course, even if it does lock in top staff, it won’t be particularly selective. "[The people who leave are] the people who know that their career will accelerate well enough that cash is worth more than the pension security they have lost," adds Cripps.
Mike Dowding, technical director at pensions consultancy PIFC, agrees that some organisations will be left with employees that aren’t at the top of their game. "There must now be quite a few middling-to-older aged employees who are not thrilled with their current jobs, but not so unhappy they feel they must leave and lose their final salary pension. They’re serving time for the sake of their pension."
With less than a quarter of the FTSE 100 offering a defined benefit (DB) pension to new employees, finding another organisation with a similar pension benefit is tough. "Nowadays it’s much less likely you’ll find an employer offering a DB pension freely to new entrants. You’d need to be in a strong enough position to negotiate discretionary entry," says Dowding. He adds that organisations don’t even have the surpluses in their schemes anymore to be able to buy out poor performing staff.
One suggestion is to improve an organisation’s performance measures to ensure that firms don’t face bucket loads of average employees picking up top rewards. There is a raft of systems that can be introduced to manage poor performance such as detailed appraisal schemes or balanced scorecard systems, but performance tends to improve most when it is approached from a line manger perspective.
While performance and reward are often linked in the form of performance-related pay and bonuses, it is not as easy to directly link benefits to performance, even if over half of respondents to Employee Benefits’ Benefits Research 2004 would like to. It would be nigh on impossible to restrict the offering of childcare vouchers, for instance, to staff only performing at a certain level. But there is a new thought emerging from organisations that offer schemes such as flexible benefits. "There are people considering having a part of their appraisal system come through to the flex scheme and rather than granting salary actually granting a one-off increase in the flex pot," says Entegria’s Cripps.
Philip Hutchinson, director of HR and reward consulting at AWD Consulting, suggests that employees should earn the amount they can spend in a flex scheme, in the same way as they would earn a bonus. While, it may then necessary to include some benefits in a core package such as certain medical insurances, it would also mean that the money employees receive could be worth more through certain salary sacrifice benefits than if taken as straight cash from a bonus.
While such performance-related reward packages would be certain to tempt trade unions to keep a close eye on proceedings to ensure staff aren’t receiving a reduced deal, they may work best in a team environment where performance can be easier to see and monitor.
Final salary pensions, three-year long company car deals and top-notch flex schemes are not the only benefits that can encourage sluggish staff to sit tight. A home computing scheme, which is on average a three-year deal between employer and employee, also has this lock-in value. Andy Lister, head of employee benefits at provider Grassroots Group, says: "Home computing schemes are almost a retention tool by default because there’s a penalty [for leaving]. If you get to month 33 or 34, it probably has no hold on you but in months one and two it’s quite penal. It is a bit of a disincentive to go unless the deal with your new employer is sufficiently attractive to make up the difference." However, he does accept that many employers would be happy to take the hit themselves if it meant getting rid of a particularly poor-performing employee.
Many organisations are proud of their ability to hold on to top staff, but they accept that the same mechanisms may be reducing their average churn. And organisations need a healthy level of turnover to make the business flow smoothly by making space to bring in new employee with fresh ideas. The Chartered Institute of Personnel and Development’s Recruitment, retention and turnover 2004 survey even shows that more than one-in-ten organisations aimed to increase turnover in the next year.
It’s a lot for benefits decision-makers to take in. Targeting a benefits programme that retains one subset of employees while ignoring others is not an easy task. But employers must spend time working out their reasons for retaining staff and then deciding how benefits are affecting these. While it won’t be the same for any two firms, figuring out what needs to be done is often the first step to solving a problem
When analysing the Football Association, you wouldn’t think it could be an organisation with retention worries.
Recruitment for football’s top jobs are passionately debated in pubs and clubs across the country, and many footie-mad fans would love to work within the bosom of the footballing establishment and the employer of the England team.
However, Paul Nolan, HR director at the FA, faces a related concern – staff do not want to leave. With a combination of the elegant surroundings of Soho Square and the amount of extra curricular training on offer, from non-work related courses and degrees to MBAs, it is not surprising why.
"I must be the only HR guy in the world who doesn’t worry about turnover as much as you normally would because we don’t have many people who want to leave," he says.
The turnover rate among the organisation’s 250 staff – the majority of which have joined in the last two to three years – is about 4%.
Nolan accepts that low staff turnover can cause problems. So in order to deal with them, and to ensure that employees are not overstaying their welcome alongside Sven Goran Eriksson, the FA operates a performance management system that highlights talented employees and makes sure that their potential is being developed, as well as helping other team members to improve.
Yahoo! has grown at a blistering rate. In the last twelve months, the number of employees in Europe has increased from 400 to 1,350.
Although retention has never been a problem in the past, Stuart Crabb, human resources director at Yahoo! Europe, understands that this could change suddenly. "Yahoo’s gone from being a very large, recognisable brand, but really quite a small information and media business, to a much larger media entertainment organisation. While our retention is very low, it’s one of those things that could change really quickly. So you have to stay ahead of what’s happening in the market."
"Low turnover is absolutely not always a good thing. Most HR people regard a healthy level of turnover as good for the organisation because it creates space inside the company for fresh faces and fresh ideas. What you need to do is understand what the norm is and what is acceptable in your market space," explains Crabb.
To ensure that Yahoo’s retention strategy is working properly, Crabb says that while he constantly updates the benefits on offer, measuring performance is also essential. "Our turnover has been historically low but at the same time we do look aggressively at performance. We consistently and relentlessly review and manage poor performance out of the business.
"Two or three years ago Yahoo! was about foosball tables and beer on Fridays. And there is still a place for that at Yahoo! but I get far more people talking to me about our retirement pension plan than I ever get asking if they can have more money behind the bar on Friday." This has led to a recent review of the company’s pension options as well as the introduction of flexible benefits, which it hopes to complete later this year.
Avoid being snared by shares
In the past share schemes have been accused of prolonging a bored employee’s tenure at an organisation by forcing staff to stay for a period of time before they can sell their shares or financially gain through a sharesave scheme. However, while introducing performance targets into share incentive plans and other all employee schemes would be difficult, Janet Cooper, head of global employee incentives at law firm Linklaters, is confident that such schemes don’t lead to employees just twiddling their thumbs.
"People can get salary trapped with pay and incentives, especially if the [share] incentives are great. If you look at Microsoft and the money they would have been making in their heyday, it would have taken a big decision to leave somewhere like that. But if the scheme is well-designed and you have strong HR policies that are performance driven, such as appraisals and personal targets, and they’re managed effectively so people know when they have to leave, then it shouldn’t be a problem," she says.