Rewarding employees effectively is like ordering coffee

CHOICE. In the movie “You’ve Got Mail,” Tom Hanks says this is one reason why it’s fun to order coffee at a nearby Starbucks outlet: the plethora of choices. Hot or cold? Tall, grande or venti? With or without whipped cream? Regular or non-fat? Caffeinated or decaffeinated? The process is decidedly empowering, plus you do get exactly the type of drink you want.

The same principle is involved when one talks about “flexible benefits,” the latest item to hit the human resource compensation “menu.” Popularly known as the cafeteria plan, a flexible benefits program entails giving employees the power of choice when it comes to their benefit packages.

First, the company determines a benefits budget for each employee. Then, instead of dictating what benefit items this budget would be allotted to, the company empowers employees to choose their own benefit items. The result then is a veritable benefit buffet table where employees can choose whatever items tickle their fancy. This deviates from the traditional benefits package where a common list of items is given to all employees.

While a seemingly new trend in rewards management, flexible benefits programs have actually been around since the 1970’s. In 2000, approximately 40% of employers in the United States had employed a flexible benefits program. While there has been a notable number of Philippine companies that have recently implemented such a program, flexible benefits plans have yet to garner widespread use in the Philippines.

Advantages

In September of 2001, Soluziona, a Spanish IT and management-consulting firm, cautiously migrated to a flexible benefits scheme. Let me now share with you the advantages of having a flexible benefit system derived from my three-year experience in delivering the program.

The most obvious advantage is that employees get to customize their packages in accordance with their own needs and contexts. You have a wife and three kids? Maybe it will be good to get health cards for your entire family, an educational plan for your children, and more paid leaves to ensure quality time. Are you a 28 year-old bachelor? Maybe that gym benefit would be attractive to you, together with that cellular phone plan. The variations are endless.

Moreover, precisely because of the customization process, a company’s benefit investment is optimized. The traditional set-up presupposes that company-offered benefits are needed and therefore utilized by all. Of course, this isn’t necessarily the case. The result? An unused benefit item, which the company nevertheless pays for. A flexible benefits scheme reduces these types of incidences from happening, ensuring that a company optimizes every centavo it allocates to its benefits.

It is also much easier for a company in a flexible setup to add new benefits to their program. For a company in a traditional set-up, adding a benefit would mean automatic costs, as all employees should be able to avail of the benefit. But additional items to a flexible benefit scheme should mean little, or more commonly no change at all, in terms of costs.

Another advantage would be an increased awareness of employees towards benefits. Since employees are co-designers of their own benefit packages, their overall awareness of company benefit policies, procedures, and programs, are very much heightened.

WHILE the advantages of a flexible benefits program are clear enough, there are some challenges that the implementation of such a system poses to a company.

• Bad choices

One challenge is the employee’s potential to make bad choices. Because employees are given the freedom to decide, they can also make mistakes in their choices. Oftentimes, some employees fail to put much needed emphasis on “protection” benefits such as health and insurance options, or fail to choose an appropriate number of leaves for the term.

• System Complexity

Another potential disadvantage is the difficulty of administering and monitoring the program. Instead of having one package to administer, a company’s HR team will have to administer a number of benefit packages equal to the number employees. Among the items the HR team has to keep track are: the employee’s benefit choices, consumption levels throughout the term, as well as the usual questions and concerns regarding each benefit. To avoid this potentially nightmarish situation, I would recommend installing an information system to help sort the amount of data that will be generated by migrating to a flexible scheme.

• Difficult bargaining

Additionally, since you cannot accurately predict the number of employees who would be choosing a particular benefit item, negotiations between benefit suppliers could also become quite tricky. Bargaining for the best prices would be more difficult, as a company migrating to a flexible benefit system would now lose the advantage of economies of scale.

My company is now on its third year of implementing flexible benefits. Through the years, we have drawn several key lessons as we continue with the endeavor of improving the benefits system of our company. Hopefully, these insights will prove helpful.

1. Proper communication is essential. The program is definitely far more complicated than most traditionally formatted benefit schemes. A planned migration will entail a good amount of explanation for the employees to properly understand and appreciate it.
2. Sufficient preparation period is quite important. Without a doubt, a company planning to migrate to a flexible scheme should do its utmost to ensure such a program is in line with how their company is structured, what it wants to achieve, and what type of people it employs.
3. It is essential to use a tax strategy with the benefit items. Employees would always want to seek value for their money. The key to doing this is to select benefits that have tax reduction implications. It is very important to check the labor laws and fringe benefit tax laws to find out which benefits have tax reduction implications and which benefits the company can use when creating their menu.
4. Administrative excellence is a must. Again, administration would include managing multiple benefit packages. Aside from utilizing an information system, back end management and administrative procedures have to be impeccable to reduce a human error and administrative problems.

Alignment

Overall, as long as there is a strategic fit with the company’s objectives, I would highly recommend migrating to a flexible benefits scheme. The reason is as basic as ordering coffee from a local coffee shop: being empowered to get exactly what you want.