A REPORT BY HARVARD BUSINESS REVIEW ANALYTIC SERVICES Benefits in the Age of Big Data and Analytics. Sponsored by

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1 A REPORT BY HARVARD BUSINESS REVIEW ANALYTIC SERVICES Benefits in the Age of Big Data and Analytics Sponsored by

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3 Benefits in the Age of Big Data and Analytics The Drive to Quantify BUSINESSES ARE ENTERING the era of big data with a bang. Thanks to a plethora of new tools that analyze more information better and faster, executives can get much closer to their customers and other stakeholders without ever leaving their offices. With such technology, for example, retailers are routinely predicting what customers will buy long before they enter a store, and financial services firms are tracking suspicious behavior to catch fraud almost instantly. Across industries, once-hazy concepts such as the return on marketing spend are coming to light through more rigorous tracking of clicks and purchases, all enabled by this new breed of technology. The human capital function is joining this march toward greater precision, despite the longstanding challenges associated with the task of finding appropriate people metrics. With an emphasis on data, some leading companies are learning how to hire to ensure greater retention, based on sophisticated models that correlate factors such as job type and length of commute. They are also getting closer to understanding the extent to which employee engagement affects revenues and how to increase both. What you re trying to do is put human behavior into a more rational form, rather than one driven by emotions, says Rudy Karsan, CEO of Kenexa, a workforce analytics software and benchmarking company that helps clients with such calculations. One of the major areas of change within the human capital function is benefits. As companies navigate the multiple objectives of satisfying employees, managing rising costs, and complying with evolving regulations related to the Patient Protection and Affordable Care Act (PPACA), they are being forced to reevaluate which benefits carry the most impact for employees and how best to deliver them. At stake is the quality of an organization s workforce and, ultimately, its financial sustainability. It is clear that American companies continue to see value in offering benefits. In a recent survey of more than 350 US-based business leaders by Harvard Business Review Analytic Services, the vast majority continue to offer some form of core benefits such as medical, dental, retirement, and vision; very few (about 5%) are planning significant cuts to any of those over the next three years. One of the most striking findings of the survey, however, is that amid unprecedented pressures, few companies have solid metrics available to guide their benefits decisions. Only 15% of respondents reported that their companies currently quantify the impact of benefits spending on any measure of business performance. Among those that do measure, only a slim percentage track benefits spending in relation to an outcome such as revenue; most are HIGHLIGHTS 50% of respondents see a strong connection between benefits and employee morale. 36% of respondents say their companies would invest more in benefits if they could quantify the impact. 15% of respondents currently quantify the impact of benefits on the bottom line. Copyright 2013 Harvard Business School Publishing. All rights reserved. BENEFITS IN THE AGE OF BIG DATA AND ANALYTICS 1

4 looking at interim measures such as retention rates or engagement. Yet it s clear that there is a need for such metrics: more than a third (36%) of all survey respondents say their companies would invest more in benefits if they could quantify the impact on the bottom line. This gap between what companies know about their benefits and what they need to know is in many ways understandable, given the difficulty such metrics pose. However, with the advent of new ways to capture and measure all kinds of data, this gap also represents a new opportunity for companies to focus their spending on what matters most for the financial security of both employees and the company. The Current State of Benefits: Attitudes and Trends Despite the lack of robust metrics around benefits spending, executives have strong opinions about their value based on experience. A solid 50% of survey respondents see a strong connection between benefits and broader corporate objectives such as employee morale and retention. Over 60% say their companies have a strong sense of responsibility regarding the financial well-being of employees and their families. Benefits are a vital component of whether or not a company is viewed as a great place to work, said the vice president of HR for a major semiconductor company in Silicon Valley. If those benefits are not sufficient, or if they are superexpensive [to employees], then employees start to be concerned. One private equity firm uses the quality of benefits packages as a screening mechanism in the due diligence phase for potential portfolio investments. What we want more than anything else is a sustainable business, because our reputation is at stake, says a managing director at the New York-based firm. How good the benefits package looks, along with relevant turnover rates, has served as a useful litmus test for us. At the same time, external pressures such as rising medical costs have already forced some major changes in benefits packages and will continue to be a top-of-mind concern, according to the Harvard Business Review Analytic Services survey. Meanwhile, the myriad of provisions that come with healthcare reform is creating new constraints, including both minimums and maximums around what companies offer to employees. There s more uncertainty than there has been in some time; everything is on the table, says an executive for the Northeast division of a midsized security firm. figure 1 As a result, many firms are planning to shift more costs to employees, along with trying to find a better deal with new insurers. At the same time, they are shuffling their workforces to create more part-time positions that may not be eligible for standard benefits packages, another cost-avoidance measure. figure 2 These changes may help a company s bottom line in the short run but raise questions about how they will affect long-term performance prospects. What matters most to employees, and what changes will alienate them or cause them to leave? How can a firm get more impact from its benefits programs without adding cost? These are the questions that both HR and finance leaders around the country are currently grappling with. figures 3 and 4 Connecting to Performance As useful as a measure of returns on benefits would be in this environment, connecting benefits with results remains a challenging task. It s easy to look at items like the cost of running a program, says the benefits director for a Fortune 500 property insurer. Now what we re trying to do is make the leap to quantifying employee productivity. Among the productivity proxies the company is considering are absenteeism (missed work) and presenteeism (lackluster performance while at work). In any case, the company will likely engage a third party to help with the task, given its complexity. figure 5 2 A HARVARD BUSINESS REVIEW ANALYTIC SERVICES REPORT

5 Figure 1 Biggest Challenges Faced in Next 3 Years To what extent do you think each of these challenges will increase in intensity over the next three years? Managing benefits costs 3% 20% 73% Dealing with the impact of healthcare reform 3% 23% 69% Improving ability to recruit quality employees 4% 26% 67% Improving productivity 4% 34% 59% Reducing turnover/boosting retention among your employees 4% 34% 59% Decrease Remain the same Increase Figure 2 Staff/Benefits Activities in 2012 Which of the following took place in 2012? Shift more benefits costs from employer to employee 57% Change in company health insurance plan/ design/carriers 50% Increase in number of temporary/contract workers 34% Increase of more than 10% in workforce 29% Figure 3 Benefits Most Likely to Be Cut Over the Next 3 Years Which of the following benefits do you think are most at risk? n=83 Medical insurance 64% Dental insurance 33% Vision insurance 31% 401(k) or 403(b) 29% BENEFITS IN THE AGE OF BIG DATA AND ANALYTICS 3

6 Figure 4 Where the Greatest Benefit Additions Will Happen in the Next 3 Years Which of the following benefits do you think will be added? Top Responses n=61 Wellness programs 46% Long-term care insurance 21% Critical illness insurance 20% 401(k) or 403(b) 18% Figure 5 Usage of Metrics to Quantify Impact on Business Performance Do you use specific techniques to quantify the impact of benefits on your business performance? 15% 40% 45% No Don t know Yes Productivity and higher retention rates are two of the most commonly cited metrics among the small group of companies that claim to be measuring the value of benefits, along with company growth, increased customer satisfaction, and decreased absenteeism. Employee engagement surveys, which ask employees how they feel about benefits, as well as more general items such as workplace culture, are also popular. figure 6 In fact, measuring the impact of benefits on business performance appears to intensify that impact. The small group of companies that report using specific metrics in this area also rises to the top in terms of seeing the greatest effect on the bottom line as a result of their benefits. figure 7 The difficulty is that the broad business performance metrics that are currently used to measure benefits are the product of many more variables outside of benefits. High involuntary turnover, for example, could just as easily mean that a company should improve its management talent as its benefits package. Most companies either can t or don t differentiate the benefits they offer by employee group to any meaningful extent, making it hard to track the difference that a change might make. This lack of precision presents some obstacles to smart decision-making, even when executives make the effort to calculate a metric such as the total cost to replace a valued employee who leaves. Knowing 4 A HARVARD BUSINESS REVIEW ANALYTIC SERVICES REPORT

7 Figure 6 Metrics Used to Measure Benefits Impact What techniques or metrics do you use to help quantify the impact of benefits on business performance? Note: Small base (n=55) Higher retention rates 65% Increased employee productivity 47% Decreased absenteeism 44% Company growth 36% Increased customer satisfaction 31% Increased quality of applicants 29% Lower cost of hiring 27% information such as the cost of an employee leaving supports decision-making which in turn will eventually support retention but the linkages are generally not that clear, says the HR head for the Silicon Valley semiconductor company. New Needs and Opportunities to Think Quantitatively About the Value of Benefits While companies grapple with how to spend smarter on benefits, technology and consulting firms are developing more sophisticated analytic tools and services to help provide some answers. Data in HR has been used since the [Alfred P.] Sloan days at General Motors, notes Kenexa CEO Karsan. The difference between now and then is that we have a lot more tools and capacity to access the data. Among the new tools that are available, according to Karsan: text-mining software that can enhance employee engagement surveys by filtering through free-response comments for trends, and assessment tools that can predict which job candidates are most likely to stay with a company based on correlations of factors such as job type and length of commute. One consulting firm, Towers Watson, says it sees a growing interest from large companies in a survey tool that asks employees to make a variety of trade-offs between different benefits options, such as a 2% pay increase compared to a week more of vacation time. This method, known as conjoint analysis, then asks employees to assess how they expect various combinations of benefits changes (such as a 2% pay increase coupled with a reduction in retirement benefits) to affect outcomes such as their motivation on the job and their propensity to stay with the firm. Assuming a company can accurately calculate the cost of each portfolio and rely on the employees selfreports, it can plot an efficiency curve that helps answer questions such as How can we decrease costs without affecting employee engagement? or How much do we have to increase costs to get an incre- BENEFITS IN THE AGE OF BIG DATA AND ANALYTICS 5

8 Figure 7 Who Sees the Positive Bottom-Line Impact of Benefits? There is a positive bottom-line impact as a result of benefit offerings. Metrics users 173 Best in class benefits providers ,000+ employees 123 Primary/involved decision makers 123 Other senior managers 114 Finance managers 100 All employees 95 1,000-9,999 employees 91 Metrics not used 77 HR managers 77 Competitive benefits providers 73 Decision influencers 64 mental increase in engagement? Those answers can vary by subgroups of employees in different roles or business units, helping customize benefits where possible. Short of a rigorous research project on benefits and motivations, though, companies can certainly get clever with the data they re already tracking, says Patrick Kulesa, a Towers Watson consultant who specializes in this field. One possibility he suggests is to correlate the length of employees short-term disability leaves with their engagement scores (or some other measure of how they feel about work) to discern whether psychological factors play a role in how quickly employees get back to work. In fact, the good news is that the turmoil in the benefits landscape offers new opportunities to measure the before and after effects of changes. For example, when one Seattle-based healthcare insurer rolled out a new wellness effort for employees that included biometric testing and community weightloss efforts, it used its in-house analytics division to track a number of metrics beyond the program costs. Among the most telling: correlations between employee health risk indicators, such as body-mass indices, and their health insurance claims costs, and correlations between participation in the wellness program and subsequent claims data. After a certain period, employees who participated were also surveyed on how they felt the program had affected their productivity at work and absenteeism rates. 6 A HARVARD BUSINESS REVIEW ANALYTIC SERVICES REPORT

9 Using the data it collected, the company learned some valuable lessons. For one, there was no clear correlation between any single biometric indicator and claims costs, but there was a more complex phenomenon at play: employees who scored out of the healthy range on all five biometric indicators had higher average annual claims than those who were out of range on three or four indicators. Both groups outspent those with two or fewer unhealthy scores. And that was just for the 60% of employees who participated in the program, says the company s benefits director. The 40% who didn t participate had even higher average annual claims costs. As it turned out, the health improvements that the program encouraged yielded claims reductions that more than covered the financial incentives that the company offered for joining the program, says the company s benefits director. In addition, the firm has calculated $1.5 million in hours gained from the increased productivity that employees report, based on average hourly wages. Key to making a metrics effort successful is a strong working relationship between human resources and finance. For one, the programs and their incentives often take a financial investment in the hundreds of thousands of dollars in the case of the Seattle health insurance company to get off the ground. They also need access to financial data and analytical capabilities either in-house or outsourced for which finance can be a rich resource. In fact, the head of total rewards at the health insurer began her career in finance, and she ultimately convinced the CFO not only to support the wellness effort but to be an executive champion for it, which also helped foster its success. On a larger scale, a company definitely needs to have a data-based culture and perhaps some analytics efforts in other, more quantitative areas of business before tackling workforce analytics, says Kenexa CEO Karsan. If they don t, they will have a hard time figuring this area out. Why Those with Best In Class Benefits Are Thriving: What Separates the Best from the Rest While it is still rare for companies to uncover a precise connection between benefits and results, some companies stand out for what they reap from the benefits they offer. Based on Harvard Business Review Analytic Services survey data and interviews with leaders in the benefits arena, excellence in benefits is a matter of strategic focus, breadth of offerings, and extraordinary communication. Figure 8 Degree of Emphasis on Employee Benefits What degree of importance do you feel your organization attaches to the current benefits plan in terms of its impact on overall staff morale and retention? 5% 31% 64% Offer solid benefits on par with other organizations Recognize importance of benefits and feel ours are among the very best ( best in class ) No great importance placed on benefits BENEFITS IN THE AGE OF BIG DATA AND ANALYTICS 7

10 Approximately 30% of respondents to the survey believe their firms offer best-in-class benefits, in contrast to the majority, who simply aim to keep up with competitors. A number of factors differentiate this group from others in ways that can be helpful for those looking to make smart changes. figure 8 A primary distinction for those with best-in-class benefits is their organizational philosophy. Those at best-in-class companies are almost three times as likely as those in companies with competitive benefits to see benefits as an investment rather than an expense and likely worthy of more thoughtful assessment rather than simple cost calculations. This stance is logical, as they are also more than twice as likely as those in companies with competitive benefits to see a positive impact on profits as a result of benefits spending. figure 9 We re not going to be overly reactive to the costs, because we have valuable benefits that are valued by employees, says the benefits director for a Fortune 500 property insurer, which aims to offer top-quartile benefits for the industry. If [a cost pressure] means we have to rebalance the total rewards program, we will stay on top of that, the director said, maintaining a holistic view of benefits rather than simply slashing at the most expensive ones. Almost all employers offer some form of core benefits such as medical, dental, and vision. The best-inclass employers, though, are more likely to offer a broader range of benefits that fall into the financial protection category, such as long-term disability insurance, long-term care insurance, and critical illness insurance. They are also more likely to offer wellness programs that encourage employees to proactively manage health concerns, often with financial incentives attached. figure 10 Taken together, these findings suggest that best-in-class benefits packages are more effective at making employees feel as though the company cares about them and their families and wants them to thrive both on and off the job. This can strengthen employee morale and engagement, and along with it, productivity, leaders say. We try to tell employees that we value you as a person with our benefits; we think people appreciate that and return the favor in their performance, says the CFO and HR director for a major healthcare organization on the East Coast. These effects can be powerful, even when employees are paying some or all of the cost of such benefits. When you re an hourly employee, you don t get paid if you miss work, so it s important to us to have Figure 9 Attitudes About Benefits Best-in-Class Companies vs. Competitive Benefits Companies Top box (8 10 where 10=agree strongly) Benefits are an investment, not just an expense Investment in employees financial well-being results in them making a greater commitment to the organization There is a positive bottom-line impact as a result of benefits offerings 22% 41% 28% 37% 16% 60% Best-in-class Competitive benefits 8 A HARVARD BUSINESS REVIEW ANALYTIC SERVICES REPORT

11 Figure 10 Comparison of Benefits Offered Best-in-Class Companies vs. Competitive Benefits Companies Long-term disability Wellness programs Long-term care insurance Defined pension benefit plan Critical illness insurance 40% 42% 28% 35% 22% 56% 67% 79% 81% 92% Best-in-class Competitive benefits options for short-term and long-term disability or catastrophic illness in place, says the controller of a specialty metalworking company. With high participation rates in the plans, it would be frowned on if we took them away, even though they re voluntary. Such options are generally popular, executives say, because they provide lower-than-market rates and a large dose of convenience. Supplemental benefits can also provide insight into what employees want more or less of, notes the benefits director of a niche retailer in the Midwest. When, for example, executives at the retailer saw large numbers signing up for supplemental dental and life insurance, those trends gave us the cue to find and fund a group plan, she says. As a result of differences such as these, those with best-in-class benefits are more than twice as likely as others to report that benefits have a significant impact on recruiting and retention as well as positive effects on the corporate bottom line. In fact, top benefits offerings appear to have a whole host of advantageous financial effects, including creating a firm that is better positioned for future growth. figures 11 and 12 These observations are borne out by some of the broader research on this topic. A recent Towers Watson analysis of 50 companies, for example, found that those with highly engaged employees saw average operating margins that were nearly three times those of companies with low engagement levels. Offering the best doesn t necessarily mean spending the most, however. Although best-in-class employers are somewhat more likely to pay for the full cost of core benefits such as medical, dental, or vision insurance, the numbers are still fairly slim about 15% of best benefits companies compared with about 5% of the rest of the population. They are also only slightly less likely than those offering competitive packages to have made or to be contemplating benefits cuts. It s important that we keep our costs down, both for the sake of employees and the end customer, says a top executive at a California-based nonprofit that aims to offer exceptional benefits in part to offset lowerthan-market compensation rates. To that end, the organization recently asked employees to begin shar- BENEFITS IN THE AGE OF BIG DATA AND ANALYTICS 9

12 Figure 11 Impact of Benefits on Key Business Areas To what extent have the benefits you offer had an impact on each of the following? (% significant impact) Recruitment of new employees Employee loyalty Firm s ability to maintain competitive advantage Employees perceptions of financial security Employee retention 15% 15% 12% 15% 15% 27% 27% 27% 26% 25% Best-in-class Competitive benefits Figure 12 How Organizations See Themselves Currently Thinking about your organization overall, please rate your level of agreement with each of the following. (% agree) Organization well positioned for growth Organization cultivates environment for increased employee productivity Currently not in a position to offer competitive salary and benefits packages 6% 19% 29% 40% 50% 57% Best-in-class Competitive benefits 10 A HARVARD BUSINESS REVIEW ANALYTIC SERVICES REPORT

13 ing part of their medical insurance costs after years of covering it fully, largely because it is important for employees to have some skin in the game; if they take a benefit for granted, it loses its effectiveness. Rather than outspending the rest, what the best-in-class tend to excel at is fostering two-way communication with employees. This allows them to get closer to employees needs and desires and consequently make their benefits as relevant to employees as possible. According to the Harvard Business Review Analytic Services survey data, they are 60% more likely than others to be responsive to employee requests for changes or additions to benefits. They are also about 30% more likely than others to use benefits providers with excellent service and to put a lot of effort into communicating benefits to employees. Looking Forward: Challenges and Changes Two important trends the need to boost workforce quality and the pressure to restructure benefits offerings are likely to continue gathering strength over the coming years. To stay competitive, then, companies will have to improve their understanding of the connection between the costs of benefits and the value they produce for employees. Companies that are looking to succeed in this arena should look for new ways to assess the value not just the costs that their benefits yield for employees and for their companies bottom lines. New analytic tools and services offer better opportunities than ever before to capture this information and use it to make more intelligent decisions about benefits spending. Short of precise calculations, however, companies should try to capitalize on three dominant trends that emerge from those companies that already consider their benefits best-in-class. BENEFITS AS A STRATEGIC INVESTMENT Across the leadership team, create more focus around the idea of benefits as an investment and a part of overall corporate strategy. Use in-house capabilities or third-party vendors to help better assess both the costs and statistical outcomes of providing various benefits options. CORPORATE CARE Leverage benefits offerings by creating a culture of caring for the employee. According to survey data, two frequently used tools to accomplish this goal are investments in wellness programs and a broad range of supplemental benefits offerings. Creating an effective communications campaign is also important. This is marketing, said one executive. You have to constantly remind employees that they re getting a better deal than they could elsewhere. LISTENING Recognize the paramount importance of two-way communication with employees to manage transitions ahead. Get creative about bringing employees attention to these issues, and offer plenty of opportunities for transparency and feedback about upcoming changes. u BENEFITS IN THE AGE OF BIG DATA AND ANALYTICS 11

14 Sponsor s Perspective Are you an HR executive? If so, we know you have a lot on your to-do list. Not only are you responsible for attracting and retaining top talent, you are expected to keep an eye on the budget as well. That s why we asked Harvard Business Review Analytic Services to examine a critical topic: the impact of benefits on a company s bottom line. As companies navigate the multiple objectives of satisfying employees, managing rising costs, and complying with evolving regulations, they are being forced to reevaluate which benefits carry the most impact for employees and how best to deliver them. At stake is the quality of an organization s workforce and, ultimately, its financial sustainability. As a leader in employee benefits, Sun Life Financial is dedicated to giving you exclusive insights that you can use to help your company, your employees, and yourself. We hope you can use this information when talking to your company s leadership about critical benefit plan decisions. For more insights you can t find anywhere else, visit us at sunlife.com/wakeup. And check back often. We ll provide new insights throughout the year, helping everyone wake up to the true benefit of benefits Sun Life Assurance Company of Canada, Wellesley Hills, MA All rights reserved. Sun Life Financial and the globe symbol are registered trademarks of Sun Life Assurance Company of Canada. SLPC /13 (exp. 06/15) 12 A HARVARD BUSINESS REVIEW ANALYTIC SERVICES REPORT

15 Methodology and Participant Profile Harvard Business Review Analytic Services received survey responses from 363 members of the Harvard Business Review Advisory Council and registered readers of HBR.org. Participant Profile Size of organization About one-third (29%) of respondents came from very large organizations with more than 10,000 employees; an approximately equal proportion (31%) came from midsized organizations with between 100 and 1000 employees. The balance worked at companies with between 1000 and 10,000 employees. Seniority Fifty percent of all respondents were in executive or senior management positions. The other 50% were in other management positions. Job function Twenty-eight percent of respondents were in human resources roles, 19% were in finance, and the balance were in other roles. Key industry sectors Almost a fifth of respondents (18%) come from the professional/business services sector, 17% are in life sciences, and 14% each are in financial and manufacturing. Ten percent are in government or not-for-profit organizations. Other sectors are each represented by less than 10% of the respondent base. Regions All respondents were based in the US, even if their organizations were global. Over half (54%) of HR respondents are involved in benefits decision-making, compared with one-third of finance managers and one-fifth of other senior manager respondents.

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