Jenny Keefe assesses how behavioural science can be used to select and evaluate the effectiveness of benefits packages
What do Marks & Spencer underwear and pensions funds have in common? They have both been criticised for bewildering people with too much choice. Marks & Spencer chief executive Stuart Rose has, in the past, bemoaned overly complex lingerie lines for turning customers off M&S while psychologists complain that pension scheme providers offer an intimidating range of pension fund options to employees.
In both instances, the case against such complexity is grounded in behavioural science: the discipline that draws on economics and psychology to understand why people act the way that they do. This school of thought believes people are not as rational as they might suppose. Instead they are inconsistent, they make mistakes, they are motivated by status and jealousy, and their decisions are influenced by the way choices are framed.
The study of behaviour in business is not new. Organisations have been swatting up on customer behaviour for decades by exploring peoples’ attitudes and perceptions to gain an insight into their patrons. Yet, organisations are lagging behind when it comes to understanding their own employees’ habits.
Lorna Gurton, client services director at research consultancy Behavioural Science Systems, says: “Behavioural science is a key factor in developing and driving change within an organisation. Up until now, the mantra has been about staff personality, but while this information is interesting, we believe it is one’s behaviour – what someone actually does – that is the important thing.”
This may sound like the latest in marketing psychobabble, but behavioural science can help employers design flexible benefits plans and motivation schemes. It also offers an answer to one of the UK’s most pressing questions: how can employers encourage their staff to save more into their pensions? The Pensions Commission’s first report into the state of the nation’s retirement savings, Pensions: challenges and choices, published in October 2004, revealed that more than 12 million workers are not saving enough for their old age and two-thirds are making no contributions at all.
There are a plethora of reasons given for this savings deficit, such as a lack of financial education or the erosion of trust in the system, but behavioural scientists believe the real reason for not setting up a pension is much simpler: people just do not get around to it. Procrastination over financial decisions is all too easy and, rather than making an active decision to opt in, employees simply push the task to the back of their minds.
Alistair Byrne, a fellow of the Pensions Institute at London’s Cass Business School, says: “Effective saving requires people to work out what they need to do and then to follow it through. Many struggle with both aspects. They struggle to understand how much they need to save to fund their retirement. They also find choice over how to invest their contributions in defined contribution (DC) schemes confusing. There is evidence that once people have worked out what to do, the number that make changes to their behaviour is small. Inertia has a powerful effect.”
Yet, rather than fight negative behaviour, employers can turn it to their advantage by, for example, auto-enrolling staff into pension schemes, thus removing the onus on the worker to take action.
Understanding the psychology of the Save More Tomorrow Programme, a 2006 study by Benartzi Shlomo and Richard Thaler of UCLA looked at 13 company schemes with an average participation rate of 13%. After introducing auto-enrolment, the rate rose to 90%.
“Education in the workplace can have an effect, but the number of people who take action as a result is quite limited. Auto-pilot devices, such as automatically enrolling employees in the DC pension scheme, seem to be more effective because they use inertia to positive effect,” explains Byrne.
Hooking members in
A case in point is ICI, the paints and chemicals group. In 2003, it introduced automatic enrolment for the first time. Take up rose by 60%. Ralph Turner, director of benefits, says: “Auto-enrolment causes people to accept a plan. Once in, they tend to stay in. They tend to be less involved in the pension process so [make a] less active selection of investment choices, but [it’s] better to have them inactive and in a plan rather than inactive and out.”
The government has recognised the benefits of auto-enrolment which will form part of its requirements for its national pensions savings scheme, due to come into effect in 2012, along with compulsory employer and employee contributions.
Once employees have been hooked in to a scheme, cleverly designed default rules can help employees boost their pension pots. Benartzi Shlomo, co-chair of the Behavioral Decision-Making Group at The Anderson School at UCLA, explains: “The same psychological principle that makes automatic enrolment so successful also causes members to stick to the low default contribution rate, often saving very little.”
One solution is to automatically boost workers’ contributions by asking employees to pre-commit to increasing them every time they receive a pay rise.
When designing pension fund options, employers should also bear in mind that too much choice can be demotivating. Just as M&S customers were jaded by the choice of too many different knickers, researchers from Columbia University in the US found that pension fund participation rates drop by 2% for every additional 10 funds offered (The psychological cost of ever increasing choice by Sheena Iyengar, 2006).
Too much choice can also apply to other perks, such as flexible benefits schemes. Workers are easily swayed by the way choices are presented.
Behavioural science can also inform the benefits that employers choose to offer their workforce; the first lesson being that money, once you pass the bottom end of the income scale, does not motivate people. In his book, The science of happiness: how our brains make us happy – and what you can do to get happier, [Marlowe & Company, 2006], Stefan Klein argues that money can bring satisfaction but the effect is minimal.
He writes: “Adding a few hundred or even a few thousand dollars to your pay check is like drinking vintage champagne instead of ordinary champagne: you will hardly notice the difference. When we get a raise, the happiness only lasts as long as the higher standard of living feels new. Enthusiasm over access to better restaurants, a beautiful car, and a bigger apartment wanes quickly.”
Moreover, employers should be wary about how they use any rewards. Robert Rosenfeld, CEO of corporate education provider the Centre for Organisational Excellence, explains, “The sad fact is that the indiscriminate use of reward and incentive programmes has created a body of employees who become cynical and increasingly de-sensitised to the desired performance outcomes.
“What is surprising is that goodies actually undermine personal motivation. The more a manager gets employees to think about what they will earn for doing their jobs well, the less interested they will be in what they are doing. The reward makes the work seem distasteful. ‘If they have to bribe me to do it,’ a person might figure, ‘it must be something that I don’t want to do.'”†
But before we all pack up and go home, the good news is that some employee benefits do encourage positive behaviour; particularly those that are centred around work-life balance and wellbeing. David MacLeod, senior consultant at Towers Perrin, says: “Rewards should be both financial and non-financial. Non-financial rewards include a whole suite of activities such as giving authentic praise, enhancing responsibilities, boosting training budgets, and giving people extrinsic recognition such as paying for dinner for the employee plus their partner.”
However, employers need to mind the generation gap if they want to appeal to younger workers. Those born between 1978 and 1995, known as generation Y, are the largest consumer group in history, according to Tony Buon, a lecturer at Aberdeen Business School, Robert Gordon University.
“The emergence of the Generation Y workforce is just now being studied by behavioural scientists. This group accepts ongoing technological change, they wish to achieve a greater work-life balance than their parents managed and have a strong resistance to tight systems of control and bureaucratically-imposed rules. These employees are less accepting of management prerogative, but the strong individualistic streak of this group means that they are not easily duped by clever management schemes attempting to change their behaviour,” Buon explains.
He adds that the trick is to target benefits to individual staff and avoid “dubious 20th-Century control strategies”, such as attendance bonuses and length of service awards.
Once employers know what makes staff tick, it is possible to communicate their benefits package more effectively. Emma Isaac, director of internal communications company Serac Communications, says: “The greater the understanding of the behaviour at play within an organisation, the more employers are able to appropriately define their messages, segment their audiences and select the most effective channels through which to communicate.”
Marketing gurus have ploughed millions into studying consumer behaviour so that they can pull people’s strings. As a result, they target messages to different ages, genders and social groups, as well as speaking to consumers in their own language and through relevant media, whether that may be the internet or print. All these techniques can be adapted by employers for use in the workplace.
Consumer products group Henkel is one such employer that is using behavioural research to get its message across. Paul Ryan, HR operations manager at the firm that manufacturers brands such as Pritt Stick glue and Schwarzkopf, says: “We try to anticipate behaviour when developing our communication strategies and materials for benefits; be it explanatory literature or links, FAQs, or simply form design and layout.”.
Case study: Henkel
Henkel gives pensions scheme that ‘glue-like’ feel
Consumer products group Henkel takes a behavioural approach to encouraging employees to save more towards their retirement.
The company, which manufactures and markets brands such as Schwarzkopf and Pritt Stick glue, gives staff a prod in the right direction by automatically enrolling them in its defined contribution scheme.
Paul Ryan, HR operations manager, explains: “You have to take positive action not to be a member [of the pension scheme]. It avoids any apathy or indecision about what is often a complex matter.” Back in 1992, when the onus was on employees to opt in rather than opt out, just 70% staff were members. Now 90% of Henkel’s 1,300 UK staff have joined the scheme.
“We introduced a waiver form where the employees had to sign away their prospective benefits if they did not want to join or remain as members. We encouraged them to take independent financial advice and left a space on the form for their partners to sign, as they are potential beneficiaries,” says Ryan.
He adds that the employer can work around employee procrastination. “Contribution levels, investment options and retirement age choices can all have defaults to avoid unintended consequences of inaction on behalf of the employee.
“The complexity can cause employees to defer decisions simply because they haven’t got round to understanding and deciding what to do. For example, using a default lifestyling matrix for investment avoids someone staying in equities right up to their retirement date unless they specifically choose to do so.”
Case study: British Library
British Library reads employees’ work-life signscase study
The British Library aims to strike a balance between financial and work-life balance incentives.
Mary Canavan, director of HR, explains: “Employees feel that the organisation values them not only through extrinsic reward, such as performance-related pay, but also through intrinsic reward, such as [providing] feedback, recognition and employee wellbeing support.”†
The organisation, which has 2,000 staff based in London and West Yorkshire, offers a raft of non-monetary perks. These include an employee assistance programme, childcare vouchers and on-site acupressure massage, Yoga and Reiki. As part of the company’s flexible working scheme, employees can vary their working patterns to suit their lifestyles. For example, every four weeks, they are allowed to build up two days holiday from extra hours worked, or carry over a working hours deficit of 1.5 days. Job sharing or compressing their hours into fewer days is also an option.
“The challenge is creating a strong bond between the individual and the organisation so that employees are prepared to go the extra mile and therefore increase [their] levels of performance,” explains Canavan.
There are some generous financial perks too. All permanent staff, and those on a contract of at least 11 months in length, are eligible for the Civil Service Pension scheme. Employees contribute 3.5% of salary; while the library pays between 17% and 25%.