As employers plan for the workforce of the future, much time and effort has been focused on training and techniques for managing multiple generations within the workforce.
After all, we have to adopt our approach for managing our most important resource. Why then, are we not ceasing the historical approach for a one-size-fits-all method for Total Compensation — providing base pay, incentives, retirement, time off, ancillary benefits, and perquisites?
It is essential to consider alternative approaches for creating and implementing Total Compensation packages. Now that multiple generations exist in the workforce, all with varied attributes and differences, a one-size-fits-all Total Compensation approach should no longer be considered. These new approaches must also be cost-effective, compliant, and competitive.
Potential Solutions:
Employers typically believe that as long as they offer a structure where each benefit offering is competitive, they are fine. Consider the following typical type of offering:
- Base compensation targeted at the 50th percentile
- Offering a variety of PPO benefits with required employee premiums and different co-pays and co-insurance levels, depending upon plan selected
- Standard level of life insurance, dental, vision, life, and disability
- 401(k) match of 50% of the first six percent deferred
But...why are employers still struggling to attract, retain, and motivate employees? Why is turnover still so high?
Employers know that the workforce is currently comprised of multiple generations. In order to satisfy employees across all generations, it is crucial for employers to develop targeted Total Compensation packages. To that end, it is practical and smart to allow employees to choose from a menu of options.
How to Develop Total Compensation Offerings:
The first step is to assemble sufficient demographic data for all current employees. This would include items such as date of birth, date of hire, family status, compensation levels (base and incentives), PTO allocations, life insurance selections, 401(k) enrollment, etc.
This would build the baseline to develop status-quo costs and assist in development of fundamental data needed to assess Total Compensation migrations. This data can be expressed in total dollars and average cost per employee.
As part of this approach, it may be beneficial to create focus groups of employees to discuss the concept and gather information about particular areas of importance from their perspectives. The members of each focus groups should be a cross-section of employees from different age groups, service lengths, locations, and genders to allow for a diverse and fair sampling.
This data—along with the building blocks of Total Compensation solutions—would be used to contract this menu of offerings. However, it is important to remember that this approach is not going to offer various options for each benefit—several different packages of benefits that offer meaningful differences while still being cost effective and compliant.
The following table illustrates a basic overview of packages:
Option 1:
Utilize more PTO and reduce levels of base compensation, medical/Rx, life, etc.
This package offering could also include a reduced level for retirement benefits and may be attractive to those with young children or a spouse who receives good benefits. It may also be of interest to those with aging parents.
Option 2:
Opt-out of medical/RX, dental & vision benefits with lower levels of life insurance disability. In lieu of a 401(K) match, funds would be used to provide for a matching school loan payment.
This package would be attractive to those just entering the workforce, are most likely still on their parents’ health plans, and have student loans to pay. This may also be of interest for employees who are being recruited with a working spouse with student loans.
As an alternate approach, in lieu of a signing bonus, an annual matching loan repayment amount can be created. For example, if an employee pays $1,000, the company can match it. This can be continued throughout several years of employment.
Option 3
Accept the “bare minimum” of core benefits and pay supplement is increased.
This is well-suited for employees who simply want to maximize cash compensation, which most commonly includes employees who are single, use the employer-provided health reimbursement arrangements, buy coverage on an exchange, and want to capitalize on earnings. This plan is also attractive to employees who are more distinguished in their careers and believe that they can better manage their own funds rather than using the 401(k) plan.
As you can imagine, there are a variety of alternative options worthy of consideration rather than just a one-size-fits-all approach. However, when evaluating options, it’s crucial that production, distribution, and service cannot be hindered. These factors must also be considered as part of the analysis.
What About Overall Administration?
Companies struggle with this already, and the options outlined above seem to make this even more difficult. The following is a summary of several issues and potential solutions:
- Pay Equity – Companies have to demonstrate that their pay practices do not discriminate against protected classes. By increasing compensation based upon benefit selection, doesn’t this make meeting this standard more difficult?
- Base compensation must be set based upon a particular role, job function, performance, and experience. Any additional compensation that is provided via these options will be tracked as an additional cash supplement tied solely to a benefit election. As such, this cash supplement would be excluded from regular base compensation and not included as part of a discrimination analysis.
- 401(k) Testing – The difficulty in complying with non-discrimination standards resulted in the use of safe-harbor plans to avoid testing. This option would then unravel all of that. This is a correct conclusion and the benefit levels designed would have to be tested to determine if they satisfy the various non-discrimination tests. It is worth noting that the Total Compensation offerings are intended to create packages to meet a diverse workforce and not intended to be indicative of pay levels. Depending on the retirement plan options created (for example, a formula for company contributions tied to total points, based upon age and/or service) satisfying discrimination requirements may not be impossible.
- Adverse Selection – Will the Total Compensation offerings potentially create adverse selection as employees will be migrating to choices as needs arise? The plan designs today already have built into them design issues that create the largest liability for an employer pertaining to exposure for benefit costs and/or high uses of PTO. These options do not appear to add to or create additional exposure for this issue.
- Recordkeeping and Administration – This option clearly creates additional administration, mainly at the time of open enrollment. Once an election is in place, the administrative burden is no greater than current, even when there is a qualified life event.
- Employee Education – This option will increase the necessary level of communication. However, this area is due for some updates anyway.
The current one-size-fits-all, status-quo approach to Total Compensation—including the annual merry-go-round process of altering deductibles, co-pays, and employee contributions—will no longer suffice if an employer truly wants to become an employer of choice. Designing Total Compensation offerings could be an effective solution.
Elliot Dinkin is president and CEO at Cowden Associates, Inc., specializing in helping corporate clients find the best solutions, both for the enterprise and its employees, with regard to compensation, health-care benefits, retirement and pension issues, and Taft-Hartley fund consulting.