Is It Possible to Be Too Generous with Employee Benefits?

Imagine a company looking for ways to expand its employee benefits to better compete for top talent. The truth is employee benefits have been a recruiting and retention tool for decades. But as benefits continue to get more expensive, companies are having to ask themselves whether or not it is possible to be too generous.

There is always that fine line between offering a strong benefits package and being so generous as to negatively impact the bottom. According to Dallas-based BenefitMall, management can focus so much time and energy on helping employees navigate their benefits packages that they don’t step back and see the financial impact of those benefits in the long term.

Being overwhelmed by benefit costs is not abnormal. However, small businesses tend to be more attuned to it than large companies and government-subsidized organizations. Nonetheless, being too generous can ultimately doom an organization’s financial health.

Benefits Costs Are Too High

We can look to Uconn Health as an extreme example of what happens when benefits packages are too generous. According to the Hartford Courant, Uconn Health’s benefits cost, on average, are 70% of an employee’s salary. It is not unusual for an employee with an annual salary of $100,000 to be given benefits that cost the system $98,000.

Uconn Health pays nearly double when they combine salary and benefits. How do they do it? Through grants and state subsidies. But here is the problem: grant money is starting to slip away. Organizations have decided they would rather invest their money at research hospitals that spend less on employee benefits and more on actual research.

Uconn Health has already lost some $40 million in grant money to employees leaving and taking their grants elsewhere. More than $17 million was transferred out when researchers left; another $20 million that would have gone to Uconn Health went elsewhere after researchers took new jobs.

Taking Money Out Of the Business

What must be understood is that employee benefits take money out of the equation. They are good and necessary, but they do not directly generate revenue. As such, employee benefits are a financial drain. Employers must balance the need to compete for top talent against having enough money to put back into growth and expansion.

For an employer like Uconn Health, the challenge in finding that sweet spot lies in the actual work they do. It’s made worse by the combination of burgeoning healthcare costs and freely flowing grant money. Both constitute artificial influences that most small businesses do not have to deal with. The end result is a workforce that has come to expect higher salaries and more generous benefits.

Going the Way of the Pension

Once again, employee benefits are both necessary and good. But there is a very real possibility that the most generous benefits packages will soon be going the way of the pension. It is hard to imagine any other outcome when you consider how quickly the cost of benefits packages is climbing.

Back in the day, a pension with guaranteed benefits was the penultimate golden goose for workers. Employers relied on pensions to attract and retain the very best. Decades later, they finally realized that there was no way to sustain guaranteed benefits without continually taking more and more money out of the organization.

Pensions ultimately gave way to 401(k)s and IRAs. Today, the old-school pension is virtually unheard of. It is not sustainable. The fear is that some overly generous benefits package will suffer the same fate. Employers will ultimately determine they are financially inviable and will begin to phase them out.

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