Do We Really Need Those Benefits?
A record leap in healthcare costs this year is forcing firms to do a major rethinking of rewards programs. Nothing is sacred.
The finance officer had done everything he could to balance the budget in previous years: renegotiating healthcare contracts, increasing employee cost sharing, and trimming coverage. Then came the news that healthcare costs were set to rise another 10%. He put his head in his hands. He was simply out of strategies.
Corporate healthcare costs are expected to jump 9.5% next year, according to professional-services firm Aon. At that rate, healthcare costs will eclipse $19,000 per employee. “There’s angst and there’s frustration—and this is also the reality in which we live,” says compensation expert Tom McMullen, senior client partner at Korn Ferry. “If we want to be in business, we’ve got to deal with it.” But how? At most firms, healthcare inflation is now being squared off against the entire rewards budget, in ways that could potentially reinvent benefits and compensation for decades to come.
To be sure, variations of this scenario have emerged in corporate circles annually for decades: “Woe is us, healthcare is so expensive.” But this year’s jump is nearly three times the rate of inflation, and the largest leap since the aughts, according to figures from the Kaiser Family Foundation. Financial officers have been facepalming, given that healthcare prices have risen between 6% and 8% over each of the past three years. “The cows have really left the barn on this,” says benefits expert Steven Kapper, associate client partner at Korn Ferry. “We’re seeing a lot of cost-shifting efforts.”
The new strategy: Rethink everything—ideally by tapping expertise beyond the conventional Rolodex. “Get an independent advisor,” says Kapper: someone who, because they’re not beholden to the industries that provide specific benefits, will use numbers to steer firms in the right direction.
Reconsidering rewards starts with asking employees which benefits they actually appreciate, and considering whether the organization really needs a benefits program similar to those of its competitors. What if poorly appreciated rewards are dropped—or made accessible only to those who want them? What if rewards are very specialized, and enjoyed by the employees who use them? What if blanket pay increases—which averaged just above 3% last year—are abandoned, so that some departments (marketing) get larger boosts than others (HR)? “It’s about getting the best possible ROI for each workforce dollar,” says McMullen, who notes that rewards budgets are being attacked “with surgical focus.”
Implicit is the idea that many rewards are no longer quite as evenly distributed as they once were. Employees in hard-to-retain roles, for example, might enjoy extra perks. In short, nothing is sacred.
This line of thinking has led a small but notable cadre of firms to go against prevailing winds and double down on offering excellent healthcare with minimal co-pays and rich benefit programs. These firms purposely differentiate their healthcare offerings from their competitors’ in the belief that they’re getting a better value by investing in healthcare rewards than they could get elsewhere. “It’s part of a deliberate strategy—and they need to do a good job at communicating that value,” says McMullen.
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