How improving staff benefits pays off

When companies start to lose staff to rivals, management's first reaction is often to stem the tide by increasing salaries. But human resources professionals are warning that this is rarely the most cost-effective - or even the most effective - solution.

When companies start to lose staff to rivals, management's first reaction is often to stem the tide by increasing salaries. But human resources professionals are warning that this is rarely the most cost-effective - or even the most effective - solution.

Instead, companies need to look at both cash benefits, such as pensions, and non-cash benefits such as gym membership. And the more competitive the market for staff, the more influential benefits packages can be. According to the Chartered Institute of Personnel and Development, labour turnover for the UK was 16.1 per cent in 2002, a four-year low. Voluntary turnover, excluding redundancy, dismissal and retirement, was 10.3 per cent.

However, the figures mask wide disparities. Voluntary turnover was 37 per cent in the hotel, restaurant and leisure sector, and 35 per cent in call centres; in retailing, turnover was 25 per cent. Manufacturing and the public sector showed lower than average turnover.

The CIPD found little in the way of a firm correlation between company size and turnover rates, but more anecdotal evidence suggests that smaller companies are having to improve benefits packages. A survey last year by Momentum, a financial advice firm, found that 59 per cent of SMEs offered all staff life assurance cover in 2002; by last year, it had risen to 76 per cent. In 2002, 22 per cent of smaller companies offered permanent health insurance (PHI); last year, over half of SMEs did so.

For managers, improving benefits packages can be a relatively inexpensive way to improve staff retention; cutting turnover can also quickly improve both morale and profits. The cost of replacing the average UK worker now runs at just over £4,000, according to the CIPD, rising to almost £7,000 for a manager, so even a small reduction in turnover can pay for itself.

"We are observing that more benefits are being introduced than removed," says Charles Cotton, rewards adviser at the CIPD. "Although it is quite a competitive financial market, it is also a competitive recruitment market. And companies have to realise that different things motivate and attract people at different times of their working life, so that means taking a more holistic approach [to remuneration].

"Younger people are more motivated by cash or career development. Someone in their thirties or forties might be more interested in flexible working or medical benefits." Since the Government introduced Stakeholder pensions in 2001, companies with five or more staff have been obliged to "provide access" to a workplace pension scheme, but they are not obliged to make any contributions.

Momentum's research suggests a direct connection between staff turnover and the level of benefits. Companies making low pension contributions (2 per cent and below) lost 38 per cent more staff than high paying firms (contributions of 10 per cent or more). Amrik Bhabra, managing director of Adecs, an IT services company in Coventry, believes that contributing to his staff's pension differentiates the company from rival employers. Adecs makes a contribution of 3 per cent for staff under 25 and for older staff this rises to 5 per cent. "It definitely has an impact on the bottom line. Our business is about people. Customers get to know the engineers, and if they move on, that is negative for us," says Mr Bhabra.

Companies are finding, however, that benefits are not the whole story: employees also have to work harder to communicate to their staff. Momentum found that companies with benefits packages that were only average increased retention through good communications. Higher benefits, poorly communicated, led to below-average retention.

"Pensions are among the most expensive benefits to offer and it is crazy that they aren't valued," says Sharon Mason Hunter, marketing manager at Momentum. "Even where pension contributions are offered, employees don't always join up." She cautions that simply putting information about pensions and other benefits into a joining pack or staff handbook is not enough to ensure that workforces understand - and value - what is on offer.

Nor is it only large companies that are remote and bureaucratic when it comes to communicating with their staff. SMEs risk falling behind larger rivals that can invest in self-service staff "portals" and flexible benefits packages, where employees can pick and choose their perks.

Putting in a system to give staff a "total remuneration statement" should cost around £15,000 for a 1,000-person business, says Gerry O'Neill, CEO of Vebnet, a technology consultancy specialising in employee benefits. A full flexible benefits system could cost around £40,000.

When staff see all their benefits on an annual statement - or can trade leave for pension contributions, or life assurance for gym membership - it makes the value of the total package that much easier to appreciate.

A flexible benefits package, along with a generous pension scheme, bonus and flexible working has helped public relations consultancy Bite keep turnover below the industry average, believes MD Sheryl Seitz. "Our churn is 20 per cent and the Public Relations Consultancy Association average is 22 to 23 per cent," she says. "That is a result of both the offer and the flexibility. And we have certainly got better at raising awareness. From the outset we talk to people about the overall package. As a result, we rarely loose people to a competing agency."