Philip Houghton and Paul Mather are Senior Consultants with Sibson Consulting, a global human capital consulting firm, based in London. Bart Huby is a Partner with Lane, Clark & Peacock LLP, an actuarial partnership with offices in London and Winchester, UK.
If you are considering making changes to your employee benefit programme, now is a good time to do it – with little volatility in the employment market there should be a minimal negative impact. As long as it is handled carefully it could be cost-effective for your business too...
Now is a good time to take a close look at the total cost and value of employee rewards and benefits. As family enterprises grow and 'professionalise' they will want to attract and retain the talent necessary to deliver their business objectives – pay and benefits will play a key role. There is also the question of how to differentiate these between family and non-family members. Furthermore, there are considerable pressures on the cost of providing traditional employee benefits. Pensions are, at present, especially problematic – combining increasingly high costs with, in recent years, poor fund performance.
Now is as good a time as ever to hold a strategic review and make changes. There is relatively little movement and volatility in the employment marketplace, and there should be little negative impact if change is carefully handled and effectively communicated to employees. As the economy picks up, however, this is likely to change.
Creating 'employee value'
The Employee Value Proposition model describes a way of looking at the employee 'deal' – what employees take away from the employment relationship. This is where the notion of human capital is becoming an increasingly well understood and important concept – organisations of all sizes recognise the importance of investing in their people in the same way they invest in other critical business assets (with some consideration for the expected returns).
Such tests do not have to apply only to salary (including any performance-based incentives); occupational pensions and employer/employee benefit costs are also a significant balance sheet item. So called 'softer' benefits such as job content, career progression, family friendly policies and recognition schemes may also be part of the mix. The 'test' for employers will be to ascertain whether the economic cost of providing the reward (salary, pension, benefit etc) is recognised and valued in at least equal measure by the employees who receive it.
Traditionally, many family-owned businesses have developed commercial and brand success by building distinctive personal relationships and close 'affiliations' with their employees. This has in part been due to the perceived nature of many family businesses and how these contrast with non-family enterprises.
Many employers have, in the past, successfully extended these positive brand attributes to attract and retain employees.
The type of work and level of engagement employees feel is largely a product of leadership. Much research shows that unhappy employees don't leave jobs – they leave bosses. Leaders must build on the quality of affiliation (or relationship) they have with their employees to ensure roles play to the employee's strengths and talents. Employees with autonomy, responsibility and regular feedback enjoy their work and greatly 'benefit' from this type of development.
Careers in family businesses are, potentially, an area of concern for more ambitious employees. The 'stereotype' of many family businesses is that the best and most senior jobs automatically go to family members. Family businesses must be clear on their policy in this area, together with an understanding of any potential consequences for key-employee attraction and retention where senior opportunities are more limited.
Family businesses have tended to take a fairly traditional approach to rewards. As the organisation grows, however, and talent management (particularly the attraction, deployment and retention of leaders) becomes more critical to achieving business aspirations, a shift is frequently required. Here there is always the question of balance and creativity. Certainly for employees in key roles – driving significant organisational value – key components can be some form of profit sharing, bonus or 'equity' participation (perhaps through a real or phantom-shareholding process).
A paternalistic approach to benefits has also been highly valued by family business employees in this area. There is, however, enormous pressure on traditional practices, particularly pensions as has been well publicised recently. There is the combination of cost pressures in our low growth economy, and also those that arise from the challenge of maintaining a set of reward programmes that are both scaleable for growth and consistent with the values that have supported success to date.
Certainly among many organisations, including family-owned enterprises, employee pension provision has become an area of increased focus in recent years. Falling interest rates combined with increasing longevity have substantially increased the cost of funding for pensions. Where pension provision is through a defined benefit (final salary) occupational pension scheme, these extra costs fall directly on the employer. Where a pension scheme is invested substantially in equities (which most are) the equity market falls of recent years are likely to have resulted in the scheme falling into deficit. This double whammy (extra costs together with falling asset values), combined with more stringent accounting standards and additional legislative requirements, have raised doubts within many organisations over whether they can afford to sustain final salary pension schemes over the long haul. Increasingly, smaller family-owned businesses will be feeling the pressure of these costs and will be looking for alternatives.
While the main alternative of switching pension provision to a defined contribution (money purchase) basis is attractive to employers from a purely financial perspective, this puts the funding risk squarely on employees' shoulders. As such, this may not be an approach that a paternalistic family business would wish to adopt. As a result, employers are now increasingly looking at middle-ground options, such as career-average or cash balance pension scheme designs, where the funding risk is shared between employer and employee.
This scenario together with present market conditions (low levels of employee attrition – wanted or unwanted) means that it is a good time to review the 'employee deal' as a whole. It is an opportunity to think more strategically about rewards in the broadest sense, recognising their potential to drive value in the business, rather than being reactive or even worse, passive about rewards and doing 'just enough to keep people in the business'.
What can you do?
A more strategic approach can produce clear advantages. It can:
- address talent and succession management issues;
- create value – both for employees and the business;
- allow better and targeted returns on investment;
- create an opportunity to focus on performance and links to rewards; and
- provide more effective cost and risk management.
When thinking about reviewing your organisation's rewards package it may be helpful to set this in a framework such as the Employee Value Proposition already mentioned, asking the question: "Assuming that each of the segments has an economic value, how do I know how to apportion my investment in employees most effectively?" Is it a single answer for the whole organisation? Or are there some employee segmentation issues that need to be thought about?
The question of segmentation is an interesting one. In any business there are critical value-creating roles that are typically more strategically important to business performance and growth than many other roles within the organisation. In order to focus resources, retain key talent and maximise return on investment organisations should be clear on which these roles are and consider designing the 'employee deal' (with reference to all elements of the 'employee value proposition') to meet the specific needs of this group. Typically this involves asking employees what is important and most highly valued in the existing benefits programme, together with what may be missing.
With a family business, there is also a particularly key segment of employees – family members. Benefits, especially pensions, can be a tax-efficient means of releasing value from the business to family members, and it may be appropriate to provide non-standard benefits to such employees in order to maximise the tax advantages. However, if this is done through an employee benefit programme (eg, a pension scheme) common to both ordinary employees and family members, there can be issues with differentiating between its use as an employee-reward tool and a family business-management tool. In such situations, it is important that it is clearly understood that the programme serves a dual purpose, and that each role is recognised and managed properly for what it is.
While final salary pension schemes have many advantages in terms of employee satisfaction, flexibility and succession management, they often involve substantial hidden cross-subsidies between different employee groups. These can mean that inadvertently substantial extra financial rewards are provided for certain employees compared to others, without this being properly understood by owners and managers (or indeed in many cases by employees).
The recent general move away from final salary pension provision now offers the opportunity to be more targeted about the rewards offered to employees in this area. For example, with a pure money purchase pension scheme the value of the employer contribution is totally explicit and there are no potential cross-subsidies. Considerable care, however, needs to be taken in making this kind of change, particularly for existing employees, as pensions are an increasingly emotive issue especially with older, longer-serving employees who may be of considerable importance to a family business.
If changes to reward programmes are viewed from a human capital perspective while utilising an effective organising framework, considerable cost effective improvements can be made to benefit the employer and employees alike. Such an exercise must be handled carefully, consulting with and engaging employees in the process, rather than using change as a vehicle for cost-cutting. The aim is to achieve enhanced employee appreciation and motivation alongside substantially reduced employer risk.