With an emphasis on attracting, retaining and motivating the best employees, a total compensation approach is crucial for organizational success given the dynamics of today’s workforce – but this approach is not without its risks. Elliot Dinkin discusses the possible rewards and what to be aware of.
Unemployment in the United States is now at an 18-year low – no doubt a factor in employee turnover reaching 60 percent. The workforce is comprised of multiple generations, with millennials representing the largest contingent at 75% of the working populace. This group also tends to think that job-hopping is great for their careers.
Likewise, customer loyalty is down, as they are typically on the lookout for high-quality, punctual, low-cost products and services. An inability to deploy the best assets — especially employees — to meet customer expectations can negatively affect a company’s earnings and ability to remain competitive. High employee turnover and job vacancies are recipes for failure.
A total compensation approach to today’s workforce is crucial for ongoing success; a one-size-fits-all approach will no longer suffice. As employee lives transition and their needs change, shouldn’t your approach to total compensation adjust to meet those changes? This perspective transforms the way employers design and manage their people strategy.
Today’s environment demands a departure from the traditional single-focus approach (e.g., compensation, benefits, retirement) to an interrelated “all-in” approach of pay and benefits. The appropriate balance is driven by business demands and total compensation philosophy.
To integrate this strategy, the next step would be to design total compensation strategies that offer employees choices of pay, benefits, time off and retirement packages that reflect an employee’s current needs while still being competitive, cost-effective and compliant. These designs must not adversely affect operations.
Risks vs. Rewards of a Total Compensation Approach
There are multiple ways to structure a total compensation offering. The status-quo approach to pay and benefits already brings with it various compliance requirements and risks. Now, these new total option/package approaches bring additional and more complicated challenges and complications.
Technology systems can help companies manage all of their current compensation and benefit plans to ensure compliance with tax, wage-and-hour and other employment-related rules. This clearly will not be enough, however, as these programs create new compliance risks, including the following:
Internal Equity and External Equity Challenges
If employers create offerings that permit employees to make trade-offs in base compensation for other benefits, how will they manage potential discrimination issues? From an operational standpoint, companies that adopt these structures will still have to track the appropriate current level of base compensation tied to the actual position and appropriate level within a salary grade. The adjustment (+/-) will have to be tracked and treated as a separate component of compensation (pay adjustment related to package option selected) versus simply adjusting base compensation. If it is not tracked as a separate component, then employers will create unintended consequences.
Discrimination Testing: Retirement Plans
Many companies have gone to a safe harbor 410(k) plan in order to avoid the need to test for discrimination. Changes created to retirement plans because of implementing total compensation offerings with differing retirement benefits will make this safe-harbor option no longer available. Separate testing will be required for this variation and the steps that can be implemented within the initial planning should be considered to mitigate this complexity. The design should contemplate a combination of factors, such as service, to facilitate meeting required testing.
Adverse Selection and Potential Impact on Costs
Companies struggle with controlling all aspects of cost – especially health care. If employers create optional total compensation solutions, how can they monitor the impact of employees migrating to plan designs when needed? This would include impact on stop-loss insurance, required contributions, wellness plans, etc. How will the potential movements in designs influence ancillary offerings, voluntary offerings, etc.? As part of the planning for these offerings, these factors will have to be considered. Can limits be placed on movement, with a requirement that employees remain in an option for a particular time period – absent a qualified life event?
Communications and Disclosures
Under the total compensation approach, employees will be afforded opportunities to move around and exchange offerings that could potentially include electing out of certain benefits, such as life and disability. If an employee does make this choice and is afforded no levels of life or disability, what will happen if he/she decides to re-enroll later? As part of the evaluation of these packages, these types of risks must be evaluated, meeting the necessary obligations for disclosure and other regulatory requirements will be necessary and workarounds to these issues will have to be considered.
When considering any type of new offerings, operational compliance matters should be evaluated as part of the total picture. They may not ultimately block the implementation but should fully be understood and accounted for as part of the program.