After simmering for more than a decade, concern over the high cost of employee benefits now verges on a crisis. Because the costs associated with human resources threaten to erode corporate profits, now more than ever the finance department must play a direct role in human-capital management. But the problem isn't simply the impossibly escalating costs: CFOs are also acutely aware of how important health and retirement plans are to retaining a talented and motivated workforce.
Several recent CFO surveys bear this out. One, conducted by research editor Don Durfee, found that 44 percent of companies consider human-capital management the key determinant of success. In a poll of readers by Harvey Research, about the same percentage of finance executives cited benefits issues as their biggest worry.
CFO magazine has devoted many stories to the topic, but because the problem has reached critical proportions, and because other research suggests that companies don't think they manage the problem well, we decided the time had come to devote an entire issue to the subject.
Unlike a conventional issue of CFO, this special edition is divided into four parts, reflecting the major components of the benefits puzzle: health care, retirement plans, IT/outsourcing, and perks. Solving the puzzle is clearly beyond the scope of any magazine. But we hope that by analyzing the component parts and identifying the partial solutions available, we can help financial executives steer their companies to a resolution that works for both employees and shareholders.
Forget Sarbanes-Oxley. The biggest headache facing Corporate America is figuring out how to provide affordable health-care coverage to employees. The price of hospital stays, pharmaceuticals, and just about every other medical product or service continues to wildly outpace inflation, inflating insurance premiums in the process. Managed care, the promised solution, failed to deliver — while Americans welcomed $5 prescriptions and no deductibles, they rebelled against restrictions on care. Politicians and even Hollywood turned HMOs into villains.
Now employers are experimenting with ways to get employees back into the cost equation. They are introducing health savings accounts and other consumerist models. They've had some luck targeting employees through wellness programs, and many have also managed to scale back pharmacy cost increases a bit. But ultimately, success might depend on convincing drug companies, medical providers, and employees that a marginally better drug or treatment isn't worth twice the price. That's a tall order.
So much for the golden years. With pensions severely underfunded and a debate raging over the health and future of Social Security, the three-legged stool of U.S. retirement funding could be close to toppling. (The third leg, personal savings, has always been a little wobbly.) This instability comes at a time when the strength of the retirement system will soon be tested under the weight of aging baby boomers. Employers have reacted to increased costs by shifting some obligations to employees. Most have already opted to provide cheaper 401(k) plans instead of traditional pensions, while others have shifted to cash-balance plans.
Yet retirement experts warn that employees aren't saving enough in their 401(k) plans to retire comfortably. And during the last downturn, some employers suspended 401(k) matching funds, making the plans more vulnerable to economic conditions. Companies that have maintained pensions — usually under pressure from unions — have been rewarded by stricter accounting rules, with more regulations on the way. Meanwhile, the Pension Benefit Guaranty Corp., which backs those pension plans, is in worsening financial condition. It all adds up to a potentially greater problem for U.S. companies: a whole generation of Americans who can't afford many goods and services.
Death to Smoothing?
The Domino Effect
In many facets of business, automation is the goal. But for human resources, it's merely the means to an end — and perhaps a new beginning. HR is often an administrative sinkhole, as staffers struggle against an overwhelming tide of paperwork and record-keeping. Health plans, 401(k)s, and other traditional benefits are a boon to not only employees but also a vast number of print shops. The question for HR departments is, if all that were to go away — through outsourcing arrangements or a self-service portal, for example — would HR's presence be diminished, or enhanced?
HR executives argue that if they can effectively tap automation to address the mundane, they will have far more time to tackle such strategic workforce issues as pay for performance, succession planning, and talent management. To be successful in those efforts will require a strong partnership with finance. Then, companies can leverage what they have always claimed is their greatest asset — their employees.
Birthday cakes, bagel Fridays, occasional gift certificates. As companies cut back on big-ticket benefits, they have come to appreciate that little things can mean a lot. Today, more companies are offering perks as varied as backup day care, flextime, life insurance, pet health insurance, transportation subsidies, paternity leave, and even concierge services. The trend emerged first in the dot-com days when companies tried to lure finicky techies (and keep them at their desks) with promises of dry-cleaning and pizza delivery.
More recently, companies have recognized that they can get more bang for the buck — especially with young employees — by subsidizing voluntary benefits. Even cheaper are arrangements that provide workers with group or pretax purchasing, where the only cost is administering the benefit. In the long run, these smaller goodies don't compensate for cutbacks in health-care coverage, but they do go a long way toward boosting employee morale without expanding the company waistline.