Case study: Lloyds TSB
Flexible benefits schemes are frequently hailed as the key to recruiting and retaining staff. Yet few employers actually measure the return on investment they are gaining from their scheme. Carrying out regular staff surveys and focus groups is one way of measuring if a scheme is meeting the organisation¬’s needs. Case study: Lloyds TSB.
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Even the most plausible theories as to why flexible benefits schemes are attractive propositions are now rarely enough to satisfy employers. HR departments are increasingly looking for solid evidence that they are achieving value for money. Mike Ashton, principal in Deloitte Human Capital Practice, says: "If we are talking to a company that doesn’t have flex it will almost certainly ask why it should be introducing it and how we can quantify the benefits. Whenever we work with clients we will therefore always set out the measures of success for that project and these will vary according to [an organisation’s] exact objectives."
Employers will have a variety of motives for offering flex and, because much depends on broader HR and business drivers, generalisations on a sector basis are not possible. Most serious measurement programmes, however, will at least seek to quantify direct cost savings and the value placed by employees on their benefits package. The measurement process should start between six months and two years before implementing a flex scheme by assessing employee opinions via surveys and focus groups. Jim Aitken, marketing director at Chase de Vere Employee Benefits, says: "Employees should be surveyed to find out what they think of their current benefits package, to explain flex to them and to find out their attitudes towards it. It is also important to establish how comfortable they would be using a PC and to ascertain what benefits they would like. This process would lead up to making recommendations with regard to what the scheme should involve."
Many of these questions should then be repeated three to six months after a scheme is launched and the values that employees place on their current flex arrangements compared with those they attached to their old benefits package. The results virtually always show a significant increase in employees’ appreciation and evaluation of their benefits package following a switch to flex. Many, for example, are better able to identify what their package is worth, whereas the value of benefits held outside flex are often underestimated by between 25% to 50%. Similar pre and post-implementation analysis is commonly conducted on direct cost savings. Martyn Phillips, a consultant at Towers Perrin, says: "We try and quantify the cost saving at outset by presenting a theoretical cost and take-up model which unifies the employer’s saving on National Insurance (NI) and the employee’s saving on tax and NI. Pensions tend to account for the majority of savings from the scheme as a whole if there is a contributory pension scheme.
If employees are making a 5% contribution, which is fairly typical, it could account for 75% of the employer’s projected NI savings. A flex scheme can also save on future cost management depending on how it is designed. "Private medical insurance (PMI) premiums have, for example, been increasing rapidly and if the employer controls how the flex fund increases then it can link it to salary inflation or retail price inflation as opposed to the total increase in cost of benefit provision. In our pre-launch feasibility study, we make assumptions about how cost savings can be realised by doing this," adds Phillips. Measuring take-up rates should be a high priority once a scheme has been launched, as should monitoring the number of hits to the website during the window when employees are able to change their benefits. In contrast to pre-implementation feasibility studies, which are very consultant-led, a lot of this post-implementation quantification is done by the scheme administrators. Although employers often use the same firm for both consultancy and administrative work, this is normally included as part and parcel of the administrative fee. If take-up rates or the number of employees who change their benefits package during the window are very low, then the employer is not getting full value from the scheme and the problem may need to be addressed by looking at communications issues or benefits mix.
A good scheme would see over 50% of members making at least some change to their package during the first year. As soon as the election window, which typically lasts between two and four weeks, closes it is advisable to carry out a survey to check that employees were happy with the process and to identify any bad experiences. A further survey between three and six months later can then ask whether members want any new benefits for the next year. One area where relatively little energy is expended, on the other hand, is in trying to measure the impact of flexible benefits schemes on recruitment and retention. There is a general consensus that the task is simply too difficult because it is hard to know to what extent factors other than the flex scheme are having an impact. Paul Lowe, senior consultant at Mercer Human Resource Consulting, says: "I haven’t seen anyone who has quantified retention and recruitment well, because it is very hard to separate out the impact of flex from that of any other HR initiative or of the general business environment. So we don’t get asked to do it much." Towers Perrin is, however, unusual in being prepared to predicate the effect on recruitment and retention within its feasibility study. It might, for example, suggest that it could reduce staff turnover by 1% and then illustrate the costs of replacing an employee by demonstrating the savings of avoiding recruitment, training and lost production costs. It also sometimes uses conjoint analysis to assess retention capabilities.
But in all areas of measuring the impact of flexible benefits schemes the conclusions can only ever be as good as the data they are based on. So the key to success is to ensure that you ask the right questions. Chris Bruce, marketing director at Thomsons Online Benefits, explains: "I think people have to be very, very clear if they are looking to achieve a financial benefit for implementing flex, so questions must be very precise. On the international flex side in particular, it is essential to ask questions relevant to the local country.
Case study: Lloyds TSB
Since introducing a flexible benefits scheme in January 2003 for its 70,000 UK and offshore employees, Lloyds TSB has deliberately only measured the more easily quantifiable aspects: NI savings for employer and employee, take-up of each of its 14 benefits, and the perceived value of the package. Monitoring take-up via a range of different bands, such as age, tax bracket and salary, helps to indicate those areas where the communication effort needs to be focussed the following year. But how employees view the offer is considered even more important than take-up, so it places considerable emphasis on conducting annual questionnaires and obtaining employee feedback at the time of enrolment. Focus groups are also run in February, a month after the benefit choices made in October’s election have come into force. Tim Fevyer, senior manager compensation and benefits at Lloyds TSB, says: "Just because [staff] don’t take something up doesn’t mean they don’t value it, because they might want to take it out the following year. The essence of flex is to enable people to meet their needs. "If employees view the scheme as valuable then we would expect other benefits such as improved recruitment and retention to be realised, but these are more difficult to quantify directly. "
Few benefit consultants refer to complex methods or technology which they use for quantifying the impact of flexible benefits schemes, but there are a couple of exceptions. Towers Perrin uses conjoint analysis to look at employee productivity on the grounds that the more engaged employees tend to be the most productive. This is essentially an employee survey or questionnaire which uses a lot of interlinking either/or type questions to gain an understanding of what motivates and drives employees. It is conducted before the flex scheme is implemented as part of the feasibility study. It can also be run separately. Thomsons Online Benefits, meanwhile, is unusual in having developed a set of tools to quantify employee attitudes, perform cost-benefit analysis to determine NI and other savings, and to analyse benefit spend and distribution. It can also analyse how a flexible scheme’s framework could be used to resolve problems presented by the impending new tax regime under pensions simplification legislation.