By Jonathan Chae

In economic downturns, companies are faced with the challenge of being highly efficient, while securing their competitive position to optimize their success ― both in the current climate and in economic recovery. Towers Watson’s recent survey revealed that more than half of companies indicated that their HR programs had been affected from a moderate to significant extent as a result of the downturn. Out of 85 companies surveyed, 27.1 percent had implemented a freeze on salary increases and another 25 percent were planning to implement such measures, if the economy deteriorates further.

Benefits expenditure, which typically ranges from 15 percent to 30 percent of employee costs, makes employee benefits an obvious target for cost management. With salary freezes and tight scrutiny over benefits in an environment of rising healthcare costs, employers are challenged to keep employees engaged whilst delivering tough news on cost constraints.

Highly successful and competitive organizations recognize the critical value of retaining and engaging key talent, both through cycles of economic difficulty and success. Recently there has been an increased adoption of “flexible benefits” by leading organizations as one tool to attract and retain key talent, through delivering the benefits most valued to an employee and at the same time, effectively containing future cost increases.

A typical flexible benefits plan comprises of “core” and “optional” benefits. Core benefits provide a minimum level of assurance for employee security and well-being ― a “safety net” for all employees. Optional benefits allow an employee to use their Flex credits to purchase extra cover on the benefits that they value the most.

Flexible benefits increase the return-on-investment (ROI) for employees. With the same amount of corporate spending on benefits, employees are able to select benefits that suit their needs, hence improving benefit value from their perspective. In addition, new benefits can be easily added to enhance an employee’s benefits experience without a corresponding increase in costs ― employees can choose to trade old benefit choices for other new benefit options.

Different organizations have varying objectives for implementing flexible benefits, of which include meeting diverse needs. Most organizations have diverse workforces with differing needs. Flexible benefit is a useful tool for addressing different demographic needs within the workforce, as employees can choose the benefits that they value the most through the various stages of their life cycle.

Flexible benefit is an effective tool for M&A. The current economic climate is seeing many leading organizations take advantage of merger and acquisition opportunities. Flex is a very effective tool to harmonize benefits across organizations. A good flexible benefits program can allow employees of both companies to continue enjoying their existing benefits without increasing benefits cost, and at the same time, ensure effectiveness in harmonizing the benefit philosophies.

In addition, flexible benefits can be designed to help share the rising costs of benefits. Private medical insurance is an excellent example of this. The cost of private medical insurance generally rises faster than the rate of pay inflation.

If the employer funding included in the flex fund or allowance is linked to pay, or some other form of indexation including an amount determined by the company, the company cost is controlled and private medical cost increases are then shared with the employee.

In traditional benefits programs, there is little correlation between the company spending and the employees' perceived value of benefits. With flexible benefits helping employees to be actively involved in their benefit choice on an annual basis, the visibility of the corporate investment is much more obvious and flexibility of the choices increases the perceived value of the benefits. With the same benefit spending, organizations can make a greater positive impact on their employees.

By having employees make their own benefits selection, understanding of these benefits is improved, therefore, Flexible benefits can be used as a platform to engage employees on a regular basis, and increase their appreciation of the benefits provided to them.

In sum, successful implementation of flexible benefits based on employee choice has a clear alignment between the business, people and total rewards strategies of an organization. An effective employee choice program is a useful tool to help leading organizations achieve their objectives around attracting, retaining and engaging key talent, whilst ensuring efficient spending on those benefits that matter most to employees throughout their work life cycle.

Jonathan Chae is a senior consultant at Towers Watson