Cost flexibility for sustainability
To ensure financial sustainability through business and economic volatility, it is important to understand the cost of work when introducing flexible work and Total Rewards policies, and to right-size fixed costs of compensation and benefits.
Today’s HR leaders are highly aware that flexibility in ways of working and human capital resiliency cannot be achieved without incurring costs. On the one hand, such costs often can be balanced against concurrent cost savings in areas such as real estate and office services resulting from flexible work. On the other hand, our research shows that, in 2020, employers consistently layered in additional costs associated with benefits, wellbeing and time off/leave while making few direct concurrent reductions in benefit program costs.
Optimizing Total Rewards spend
In 2021, due to continued uncertainties in the operating environment, leaders report diligent and continued focus on cost management and capital preservation. To be able to invest in sustainable human capital strategies of the future, employers will need to engage in multiple cost optimization strategies, including:
- Freeing up funds to allow greater flexibility in their work and Total Rewards costs
- Allocating such investment in line with what employees value and what needs employer support
- Eliminating underutilized programs (costs of such programs can quickly add up to meaningful sums)
- Negotiating value-added services from vendors
- Actively managing benefit costs, funding and risks
Active management of costs
In many countries, health care costs are expected to double over the next 10 years. Similarly, costs and risks of legacy defined benefit pension arrangements are high due to low interest rates and volatility in equity/financial markets. Unmanaged costs put pressure on total compensation budgets and redirect investments away from human capital strategies that matter. Actively managing costs enables the highest priority — and highest impact — programs.
While organizations have long been focused on managing costs and risks of defined benefit plans, as well as implementing policies to manage rising costs of pay and health care, the COVID-19 crisis has highlighted the urgency of understanding sources of costs and risks; modeling future costs under various economic, demographic and health care trend scenarios; continuing to implement strategies to avoid risks; and measuring progress of actions taken.
Actions companies should consider
- Identify where work redesign and the total cost of work can be optimized through work alternatives (e.g., shifting where/when/how work gets done for high incumbent roles).
- Implement a formal flexible work policy or set of guidelines to manage alternative work options to optimize cost of work.
- Assess potential savings from reduction/elimination of pre-COVID-19 benefits (e.g., transportation allowance, office meals/fruit) and other fixed costs (e.g., real estate). Consider redirecting costs/benefits (e.g., invest in technology, wellbeing, collaboration, increased flexible allowances). Eliminate or redesign other underutilized benefits and use choice/flexibility in benefits to meet diverse needs across the workforce.
- Review current designs and costs of Total Rewards programs to evaluate options to introduce greater flexibility in line with business performance, cost-sharing arrangements with employees and caps on payouts.
Total Rewards Optimization and Prioritization
- Understand the financial health and objectives of the company and outline primary value of investment (VOI) goals (e.g., reduce, keep neutral or increase Total Rewards costs) near, short and longer term.
- Conduct TRO or TRP analysis across key markets to identify the impact on perceived value and cost of making changes to programs, with focused alignment to fit the company culture.
- Assess the impact of TRO/TRP results by demographic cohorts (e.g., equitable TRO) to develop a segmentation strategy in conjunction with current and future strategic workforce requirements and to address attraction and retention challenges.
- Combine TRO/TRP findings with other internal and external insights. Develop a Total Rewards strategy in conjunction with other HR functions (e.g., talent acquisition, talent management). Prioritize changes based on criticality, strategic importance and ongoing financial, risk and operational implications while taking into account time, effort and cost of implementation.
- Identify opportunities to align with broader DEI efforts, where applicable.
Active management of benefit costs and risks
- Project benefit costs under multiple economic and demographic scenarios to understand sources of costs (and risks measured as volatility of such costs).
- Identify important cost implications and categorize into what can be avoided (e.g., unexpected tax and legal implications of working from another country/province/state), controlled (e.g., cost of medical care incurred/claims from another country other than the home country), or made optional for employees or transferred to third parties (e.g., introduce choice in benefit design or employee buy-up options, salary decrease based on location). Implement respective decisions and actions under each group.
- Implement systematic de-risking of defined benefit pension programs to control costs and their volatility; consider enhanced flexible phased retirement programs aligned with new ways of working.
- Implement robust governance and operating protocols to execute cost/risk management strategies in collaboration with stakeholders across businesses, functions and geographies.
- Revisit ongoing benefit program governance and operations; consider the effect of staffing levels, technology changes and evolutions to outsource operational risk.
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