by Neil Quinn
I get nervous when HR professionals use benchmarks as their primary criteria to determine how much to pay employees or spend on benefits.
Everybody wants to have a number so they’ll know whether they’re overspending or underspending compared with the competition. But those numbers are so rarely relevant to an individual organization.
Benchmarks are averages. They might compare spending among organizations in your industry or size range, but the numbers that they reveal fall far short of what you need to know for effective planning.
• Problem No. 1: Most of the information that benchmarkers use to get to an average isn’t relevant to your organization. Do you hire employees only from your industry or who work at a same-size company? Of course not. To be competitive, look at employers in your area with whom you compete directly for talent.
• Problem No. 2. Benchmarks for benefits spending can be misleading because they don’t reveal true costs. Benchmarks don’t take into account factors like how much of the cost of a benefit is paid for by employees—especially a factor with health benefits.
• Problem No. 3. The numbers don’t offer a side-by-side comparison of other organizations exactly like yours. Do you know how many employees the firms that make up the benchmark have, how old those workers are, how healthy they are or whether they’re unionized?
• Problem No. 4. This is the biggest one. Why would you want to base decisions about how you treat your employees on an average number?
Think for a moment about any other side of your business: safety, quality assurance or customer service, for instance. If you saw that your organization was just about average in any of those areas, would you say, “Good enough?” I doubt it. Why do it for comp and benefits?
My proposal: Put less stock in external benchmarks, and figure out what your company needs to attract and retain high-quality employees. Then devise a strategy to get what you need. Here are five ideas to consider:
1. Decide what your organization wants to accomplish when it comes to its employees. Do you want a healthier workforce? If so, you might need to spend more than the national average on wellness. Figure out how to shuffle your firm’s limited funds to accomplish your goal.
2. Set a “stretch” goal to create a total compensation cost structure that allows your employees’ net earnings to increase each year rather than to stay static or decline. If you set that goal, it will completely change how you manage comp and benefits. Consider the experience of a client of mine who shifted escalating health plan costs to employees every year (rather than deal with the root cause). Result: net pay decreases and higher employee turnover, because pay raises weren’t covering the higher premiums.
3. Benchmark your organization against itself. Once you set your goals, compare the company’s performance in those areas against its progress each quarter and each year.
4. Get involved with an employer’s resource council or a health action council. They’re great sources of outside validation. The participants deliver more relevant, more local and more detailed numbers beyond averages.
5. Partner with your organization’s financial experts. They’ll offer you a good, cold dose of reality. They know what your company’s balance sheet looks like. Have a conversation with finance about how to balance your organization’s goals for revenue, sales and expenses with its goals for employee health, compensation, retention and productivity.
Before you look outward for guidance on how much you should spend and on what, look inward. Custom-tailor your comp and benefits spending to the needs of your organization and its employees, not on a number in a report that probably has little relevance to either of them.
Author: Neil Quinn is vice president and director of healthservices with Oswald Companies in Cleveland. Contact him at email@example.com.
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