COMPENSATION AND BENEFITS

WHAT IS A COMPENSATION PLAN?

A compensation plan, also referred to as a “total compensation plan,” encompasses all of the compensatory
components of a company’s strategy – employees’ wages, salaries, benefits and total terms of payment. Employee
compensation plans also include raise schedules, all fringe benefits, and any union perks or employer-provided
vendor discounts.

A strategically designed compensation philosophy that is kept current, relevant and in accordance with
employment laws, supports several important components of your business:

Strategic plans
Budgeting and business goals
Industry-competitive challenges
Operating needs
Total reward strategies that support retention of the company’s top talent

The Society for Human Resource Management (SHRM) further outlines the purpose and value of
maintaining a dynamic and strategic compensation program:

 It describes how your organization’s pay and compensation philosophies support your business strategy,
competitiveness within the industry, operating objectives and staff needs.
 It helps attract qualified candidates to join your organization.
 It serves as a strong motivator for employees to perform at high levels and exceed goals.
 It helps keep your business competitive in the marketplace in terms of base pay, incentives, total
compensation and benefits opportunities.
 A compensation program constitutes a company’s total method of remuneration, including payment,
benefits and any other form of compensation for services rendered.

WHY DO COMPANIES NEED A COMPENSATION PLAN?

Companies need a thoughtful compensation program to remain competitive within their industry and to attract
and retain top talent. Employers who just go with whatever they feel they should pay their employees will slowly
lose the talent game they are playing with their competitors. Additionally, managing a workforce without a
predetermined budget is insanity in action. Compensation programs allow for consistent and predictable
budgeting and planning.

According to PayScale’s 2020 Compensation Best Practices report, companies are having a tougher time than
ever finding (and keeping) enough skilled talent to fill all of their needs. To attract and retain the top workers
they desire, more organizations are focusing on building “an employer brand, which includes a more strategic
approach to compensation and career pathing as well as better benefits and more varied and incentivizing ways
to reward performance.”

COMPONENTS OF COMPENSATION INCLUDE THE FOLLOWING FOUR ITEMS:

1. Base pay, either an hourly wage or salary. Base pay is frequently a major decision factor for most
employees in deciding to accept the job.

2. Wage and salary add-ons. These include overtime pay, shift differential, premium pay for working
weekends and holidays, and other add-ons.

3. Incentive pay for performance. Incentives give workers strong reasons to perform above the standard.
4. Benefits. This provides something of value to the employee. Benefits cost the company money even though
they aren’t direct compensation.

Components of Employee Compensation and Compensation Management (in detail)

Components of an Employee Compensation – Base Pay Structure, Variable Pay Programs, Benefits, Rewards &
Recognition
It is important to understand the laws of the land and taxation policy to understand the components of
compensation and compensation strategies. Organizations always pay for the work done (job) and less for the
individuals, job is the nucleus for determining compensation. Each organization will have its own way of defining
jobs and determining hierarchy of jobs.
However for simplicity the components of jobs shall look like:
1. Base Pay Structure (Fixed component);
2. Variable Pay Programs;
3. Benefits;
4. Rewards & Recognition.

Component # 1. Base Pay Structure (Fixed Component):

Salaries and wage are the periodic assured payments made to the employees. Salaries are generally paid to the
permanent employees on the monthly basis, whereas wages are paid to temporary or contractual workers on the
daily basis.
Base Pay is the fixed component and generally consists of the following:
i. Basic Component:
Normally 40 percent of the base pay is basic and rest of the base pay falls under various other, categories. This
breakage is governed by the tax laws of the land. In India, for instance, if everything is given to an employee in
the form of basic the whole shall be taxed, whereas if the base pay is broken into sub-components like HRA
certain tax-exemptions may be obtained.
ii. HRA (House Rent Allowance):
Calculated as a percentage of basic. HRA limits are fixed by the government and are uniformly applicable. If a
company decides to pay more than the limit decided by the company it can however the excess shall be taxed as
is the basic. If a company pays HRA component then it must collect proofs of rent-paid (rental receipts) from the
employee.
iii. DA (Dearness Allowance):
It is calculated as a percentage of basic. The payment of dearness allowance facilitates employees and workers
to face the price increase or inflation of prices of goods and services. The onslaught of price increase has a major
bearing on the living conditions of the labor.
The increasing prices reduce the compensation to nothing and the money’s worth comes down based on the level
of inflation. The payment of dearness allowance, which may be a fixed percentage on the basic wage, enables the
employees to face the increasing prices.
iv. Leave Travel Allowance:
Leave Travel allowance or LTA is paid by certain companies. However again proofs of travel expenses must be
collected by the company from the employees.
v. Mobile Expenses:
Medical Allowance/Reimbursements, etc.

Component # 2. Variable Pay Programs:

Variable pay programs are generally classified differently for sales and non-sales.
i. Variable Pay Plans for Sales:
Variable pay plans for sales represents a pay-mix that may be a 70-30 or 60-40 or 50-50 plan. Here the 30, 40 or
50 represents the variable portion of the pay and is linked to the targets. Targets could be product-based, territory-
based, revenue-based, and profitability-based or based on new business creation.
ii. Variable Pay Plans for Non-Sales:
Such pay plans are for those employees who either are those who need incentives to propel their work or are
those whose performance can be improved by giving them incentives like insurance plans, credit cards, mutual
funds etc. Generally the variable portion in non-sales is lesser than in case of sales.
The variable pay is based on jobs and levels of job. Sometimes such plans may be covered under company-wide
plans and the entire variable portion may be broken under employee performance, functional performance (i.e.
performance of the function in which that employee works) and organizational performance.
The various variable-pay components can be:
a. Bonus:
Bonus is generally post-facto. The bonus can be paid in different ways. It can be fixed percentage on the basic
wage paid annually or in proportion to the profitability. The Government also prescribes a minimum statutory
bonus for all employees and workers.
There is also a bonus plan which compensates the Managers and employees based on the sales revenue or Profit
margin achieved. Bonus plans can also be based on piece wages but depends upon the productivity of labor.
b. Commissions:
Commission to Managers and employees may be based on the sales revenue or profits of the company. It is
always a fixed percentage on the target achieved. For taxation purposes, commission is again a taxable component
of compensation. The payment of commission as a component of commission is practiced heavily in target based
sales. Depending upon the targets achieved, companies may pay a commission on a monthly or periodical basis.
c. Mixed Plans:
Companies may also pay employees and others a combination of pay as well as commissions. This plan is called
combination or mixed plan. Apart from the salaries paid, the employees may be eligible for a fixed percentage of
commission upon achievement of fixed target of sales or profits or Performance objectives. Nowadays, most of
the corporate sector is following this practice. This is also termed as variable component of compensation.
d. Incentives:
Incentive is clearly defined, target-related and upfront. Piece rate wages are prevalent in the manufacturing wages.
The labourers are paid wages for each of the quantity produced by them. The gross earnings of the labor would
be equivalent to number of goods produced by them.
Piece rate wages improve productivity and is an absolute measurement of productivity to wage structure. The
fairness of compensation is totally based on the productivity and not by any subjective factor. The CANTT
productivity planning and Taylor’s plan of wages are examples of piece rate wages and the related consequences.
e. Sign on Bonuses:
The latest trend in the compensation planning is the lump sum bonus for the incoming employee. A person, who
accepts the offer, is paid a lump sum as a bonus. Even though this practice is not prevalent in most of the
industries, Equity research and investment banking companies are paying sign-on-bonuses to attract scarce talent.
f. Profit Sharing Payments:
Profit sharing is again a novel concept nowadays. This can be paid through payment of cash or through ESOPS.
The structuring of wages may be done in such a way that, it attracts competitiveness and improved productivity.
g. Stock Options:
Stock options are given to employees for two primary purposes – one to have long-term interest of the employee
and second to link individual performance to organizational performance.

Component # 3. Benefits:
The benefits may be monetary or non-monetary, long-term or short-term, free or at concessional rates and may
include education, housing, medical, or recreational facilities, provided individually or collectively, inside or
outside the organizational premises.
Companies are increasingly taking the employees to a ‘total rewards perspective’ that involves considering base
pay, variable pay, employment benefits and work-life balance together. Despite this the benefits that a company
provides to its employees have remained threadbare or minimum owing to the prevailing tough economic
conditions. However in future there is chance of the revival of benefits.
WHAT IS DIRECT AND INDIRECT COMPENSATION?

The most foundational of compensation components are either “direct” forms such as salary, hourly pay,
commission, or bonus monies, or “indirect” forms, which are benefits of various kinds.
The 4 types of direct compensation
Although you can use any of the four types to compensate employees for their work, employers typically choose
one and stick with it. The exception is bonus pay, which is meant to be an addition to regular pay based on
employee or company performance.
Salary
The most traditional form of salary is a monetary amount scheduled over a one-year period. How often salaried
employees are paid is another part of the compensation strategy, but businesses typically pay their employees
every two weeks.
Salary is the most common method of direct compensation for exempt employees. An exempt employee is not
eligible for overtime pay. They receive a base salary for the work they perform rather than an hourly rate, so
employers pay exempt employees for the job they do instead of the number of hours they work.
Hourly pay
Non-exempt employees are typically paid an hourly rate, eligible for overtime pay and guaranteed at least
minimum wage. When an employee works over 40 hours in a workweek, their employer must pay them overtime.
Hourly rate of pay is typically a predetermined dollar amount per hour of work. Typically, nonexempt employees
are paid an hourly rate rather than a salary. They employees generally keep a timecard or clock in and out to
begin and end their work shift. During times of slow or reduced work, or a change in a company’s budget, non-
exempt employees may not work as many hours as they did in previous weeks. Thus, there is no guarantee of a
routine number of hours worked per pay period.
Commission
When compensation is based on volume, production or a predefined level of performance, this is a commission.
Other expressions of this type of remuneration are “piecework” and “piecemeal.”
Most commonly, there are two methods utilized and referred to as paid commission. One calculus is based on
volume of services performed or products made. The second form is structured around sales volume. An example
of a worker with this type of compensation is a real estate broker: They sell a house and will be compensated off
of that sale. It doesn’t matter how long or what work activities it took to sell the house, only that the house was
sold.
Bonus pay
Bonuses are used to motivate employees or increase their overall performance. This is a variable method of
compensation that is commonly associated with sales professionals, who tend to be salaried or exempt personnel.
For example, if a sales professional exceeds her quarterly target by a certain dollar amount, based on a
predetermined matrix, she receives a commensurate bonus.
Bonuses can also be paid for company performance, as well as when difficult-to-fill positions are filled with
employees with unique or highly sought-after skills or experience.

Types of indirect compensation

Indirect compensation can be any fringe benefit that employers offer. Most commonly, it refers to the various
types of insurance offered by employers, including medical, dental, life, short- and long-term disability, and
vision. Employee retirement programs, like 401(k) plans, are another common form of indirect compensation.
Equity-based programs are another compensation offering, though these aren’t typically offered within the small
business realm. Equity-based compensation is generally some sort of share or stock in the company.
These are some other examples of indirect compensation:
 Disability income protection
 Vacation days or paid time off (PTO)
 Paid holidays
 Flexible working hours or scheduling
 Other forms of retirement benefits
 Opportunities for advancement
 Student loan assistance
  Educational benefits
 Assistance with child care expenses
 Relocation benefits
 Company car
 Company equipment (laptops, mobile phones, etc.)

• Profit-sharing plans- Under a profit-sharing plan, profits shared with employees (typically, all employees)
often based on meeting a predetermined financial goal. Awards may be made in cash or contributed to a
qualified or non-qualified retirement plan.
• Gainsharing is best described as a system of management in which an organization seeks higher levels of
performance through the involvement and participation of its people. As performance improves, employees
share financially in the gain. It is a team approach; generally all the employees at a site or operation are
included.
• An employee stock ownership plan (ESOP) is an employee-owner program that provides a company's
workforce with an ownership interest in the company. In an ESOP, companies provide their
employees with stock ownership, often at no upfront cost to the employees.
• An executive stock option is a contract that grants the right to buy a specified number of shares of the
company's stock at a guaranteed "strike price" for a period of time, usually several years.
• Deferred compensation is an arrangement in which a portion of an employee's income is paid out at a later
date after which the income was earned. Examples of deferred compensation include pensions, retirement
plans, and employee stock options.
• Piece rate system is the method of remunerating the workers according to the number of unit produced or
job completed. It is also known as payment by result or output. Piece rate system pays wages at a fixed piece
rate for each unit of output produced.

DEVELOPMENT OF A PAY SYSTEM

Developing a pay structure involves evaluating jobs and establishing associated salary ranges and grades based
on market data and the company’s compensation policy. The relative value of different roles is based on factors
including responsibility, experience and education, key skills, effort/impact, and working conditions. A well-
designed and transparent pay structure should help an organization attract and retain talent be perceived as fair
andequitable.
The steps involved in the process are outlined below:
1. Conduct a job analysis/ Job Description- A job analysis involves identifying the essential tasks and
responsibilities of a job, including knowledge skills and abilities.

A. Conduct a job evaluation. Determine the relevance and value of the job to the organization. This involves
comparing or evaluating roles based on criteria such as the required education and experience, skills, effort,
level of responsibility or authority and potential revenue impact. In order to avoid introducing bias, the role
should be evaluated based on the job criteria, not a specific employee in that role.
B. Gather data for your pay structure. Use one or both of the following methods to do so:

1. Market Pricing (or benchmarking). Setting a salary range based on market data. Note that job
titles and descriptions aren’t necessarily consistent across companies and industries. When
conducting research, consider job details or descriptions to select appropriate salary benchmarks.
2. Pay grades. Establishing salary ranges for job groups. Pay grades are salary ranges established
for groups of jobs with a similar value to the organization. For example, multiple sales roles may
be included in the same grade if they require the same education, experience, skills and
responsibility. In practice, then, the salaries of every sales person in the same grade would fall
between the minimum and maximum of the range.
Pay grades can be based on market prices, as mentioned above, or actual salaries or a combination of the two
methods. For example, you could use market data to establish the salary range for a specific pay grade and use
actual salaries to determine the midpoint in the range. To establish pay grades based solely on actual salaries,
create groups based on levels in the organizational hierarchy. For example, managers and vice presidents would
be two separate pay grades. Multiple roles with similar organizational value, requirements and salaries can be
included in the same group. The midpoint of the average of the salaries in a group can form the midpoint of the
range. The minimum and maximum of a range can be calculated from the midpoint or relative to a lower and
higher grade to form a logical progression.
FACTORS AFFECTING WAGE / SALARY LEVELS
1. The organization’s ability to pay- organization decisions on job and wage structures represent a -balancing of
the aforementioned forces. But the strength of these forces varies by organization type and within organizations
by job clusters. Banks, insurance companies, department stores, and restaurants are organizations with primarily
market-oriented wage structures. Professionals are groups of employees whose jobs have been designed largely
by the educational process they have been through. This makes for a commonality between organizations in the
design of professional jobs. Organizations having many specialized jobs, dealing in labor markets too
disorganized to provide adequate grading and pricing, and lacking unionization have primarily internally
determined wage structures. Product markets may influence such wage structures, but only if labor cost is high
relative to total cost. Internally determined wage structures result from management decisions and may range
from highly rational structures flowing from job evaluation to a system of personal rates. Most large, unionized
organizations have what might be called union-and-product-oriented wage structures. In these organizations,
wage structures represent management decisions -shaped and restrained by technology, unions, and cost-price
relationships, and the product market. Technology provides some uniformity in job structures in organizations
engaged in common lines of production. Unions, through their insistence on traditional relationships, Establish
some key jobs and job clusters and provide an upward thrust to the entire structure. Cost-price relationships and
the product market compel the organization to resist this upward push and to make changes in jobs and job
relationships in line with such resistance. Low ratios of labor cost to total cost and inelastic product demand,
however, reduce competitive pressures on organizations. Professional employees (such as engineers) have salary
structures that combine market orientation and internal determination, regardless of the major activity of the
organization. Managerial salary structures are primarily internally determined except in very tight labor markets,
without regard to organization type.
2. Supply and demand of labor
The labor market conditions or supply and demand forces operate at the national, regional and local levels, and
determine organizational wage structure and level. if the demand for certain skills is high and the supply is low,
the result is a rise in the price to be paid for these skills. When prolonged and acute, these labor-market pressures
probably force most organizations to “reclassify hard-to-fill jobs at a higher level” than that suggested by the job
evaluation. The other alternative is to pay higher wages if the labor supply is scarce; and lower wages when it is
excessive. Similarly, if there is great demand for labor expertise, wages rise; but if the demand for manpower
skill is minimal, the wages will be relatively low. “The supply and demand compensation criterion is very closely
related to the prevailing pay, comparable wage and on-going wage concepts since, in essence, all of these
remuneration standards are determined by immediate market forces and factors.”
3. Prevailing market rate- This is also known as the ‘comparable wage’ or ‘gain wage rate’, and is the most widely
used criterion. An organization’s compensation policies generally tend to conform to the wage rates payable by
the industry and the community.
This is done for several reasons:
· first, competition demands that competitors adhere to the same relative wage level.
· second, various government laws and judicial decisions make the adoption of uniform wage rates an attractive
proposition.
· third, trade unions encourage this practice so that their members can have equal pay, equal work and
geographical differences may be eliminated.
· fourth, functionally related firms in the same industry require essentially the same quality of employees, with
the same skills and experience. This results in a considerable uniformity in wage and salary rates.
· finally, if the same or about the same general rates of wages are not paid to the employees as are paid by the
organization’s competitors, it will not be able to attract and maintain a sufficient quantity and quality of
manpower.
4. The cost of living- The cost-of living pay criterion is usually regarded as an auto minimum equity pay criterion.
This criterion calls for pay adjustments based on increases or decreases in an acceptable cost of living index. In
recognition of the influence of the cost of living, “escalator clauses” are written into labor contracts. When the
cost of living increases, workers and trade unions demand adjusted wages to offset the erosion of real wages.
However, when living costs are stable or decline the management does not resort to this argument as a reason for
wage reductions.
5. Productivity- it is a criterion, and is measured in terms of output per man hour. it is not due to labor efforts
alone. Technological improvements, better organization and management, the development of better methods of
production by labor and management, greater ingenuity and skill by labor are all responsible for the increase in
productivity. Actually, productivity measures the contribution. Of all the resource factors - men, machines,
methods, materials and management. No productivity index can be devised which will measure only the
productivity of a specific factor of production.
6. Trade union’s bargaining power- trade unions do affect rate of wages. Generally, the stronger and more
powerful the trade union, the higher the wages. A trade union’s bargaining power is often measured in terms of
its membership, its financial strength and the nature of its leadership. A strike or a threat of a strike is the most
powerful weapon used by it. Sometimes trade unions force wages up faster than increases in productivity would
allow and become responsible for unemployment or higher prices and inflation. However, for those remaining
on the pay roll, a real gain is often achieved as a consequence of a trade union’s stronger bargaining power.
Unions affect wage structure, but the differential effects of craft and industrial unionism and the type of
bargaining relationship are considerable. Craft unions tend to determine craft rates as well as the design of craft
jobs for all organizations employing members of the craft.
7. Job requirements- generally, the more difficult a job, the higher are the wages measures of job difficulty are
frequently used when the relative value of one job to another in an organization is to be ascertained. Jobs are
graded according to the relative skill, effort, responsibility, and job conditions required.
8. Managerial attitudes- these have a decisive influence on the wage structure and wage level since judgment is
exercised in many areas of wage and salary administration - including whether the firm should pay below average,
or above average rates, what job factors should be’ used to reflect job worth, the weight to be given for
performance or length of service, and so forth, both the structure and level- of wages are bound to bound to be
affected accordingly. These matters require the approval of the top executives. lester observes, “top
management’s desire to maintain or enhance the company’s prestige has been a major factor in the wage policy
of a number of firms. Desires to improve or maintain morale, to attract high-caliber employees, to reduce
turnover, and to provide a high living standard for employees as possible also appear to be factors in
management’s wage-policy decisions.
9. Skill levels available in the market- with the rapid growth of industries, business trade, there is shortage of
skilled resources. The technological development, automation has been affecting the skill levels at faster rates.
Thus the wage levels of skilled employees are constantly changing and an organization has to keep its level up to
suit the market needs.

Wellness programs- refer articles in the reference material section

Human Resource Management
How
Wellness to Design
Plan a Corporate
That Actually
Works
by Hector De La Torre and Ron Goetzel, Ph.D.
March 31, 2016

Lately, there’s been some debate about whether workplace health

promotion programs, more commonly known as wellness
programs, work. To us, it’s similar to asking whether reviews,
training programs, employee assistance services, or other
company initiatives are effective for both worker performance
and the bottom line. The honest answer is that some are
successful while others fail. And most of the time this comes
down to how they’re designed and executed.
So how do you create an evidence-based health promotion
program that does work? And what can employers do to avoid
common pitfalls that lead to ineffective and, in worse case
scenarios, harmful initiatives?

To tackle these questions, our respective organizations

(the Transamerica Center for Health Studies and the Institute for
Health and Productivity Studies at the Johns Hopkins Bloomberg
School of Public Health) prepared a report, “From Evidence to
Practice: Workplace Wellness that Works.” It offers practical
advice to employers, large and small, based on the latest research
on workplace programs, expert advice from practitioners and
candid interviews with business leaders.

One of the biggest lessons we learned in the process of creating

the report is one-time events masquerading as health promotion
programs – that is, activities not integrated into a comprehensive
workplace health promotion strategy – are likely to fail. And there
are five common ways these solitary initiatives tend to pop up in
companies.

Administering health risk assessments only. Health

assessments typically involve asking employees questions about
modifiable risks, such as smoking behavior, physical inactivity,
poor diet, and high stress levels. Oftentimes, these surveys are
coupled with biometric screenings of blood pressure, cholesterol,
height/weight, and blood glucose levels. But providing feedback
reports that remind employees that smoking, not exercising, or
being overweight is unhealthy does not motivate change unless
workers are given the tools and resources to actually change and
track their behaviors.

Undoing decades of poor health habits won’t be achieved by

asking employees to complete a 15-minute questionnaire. And for
otherwise healthy employees, frequent biometric screening is
often unnecessary, and from a clinical standpoint may do more
harm than good because follow-up treatments can be
unnecessary and costly.
Paying people to change their habits. While financial incentive
programs are popular, they may not achieve long-term behavior
change; instead, they may lead to resentment and even rebellion
among workers. This is because many traditional incentive
programs are grounded on the assumption that people will
behave in certain rational ways if paid to do so. Behavioral
economics tells us otherwise: Sometimes people do things that
are irrational and even counter to their best interests. Individuals
may not focus on long-term benefits of a given action when a
short-term reward (for example smoking a cigarette, consuming a
large pizza, or spending hours watching television) is more
appealing.

While there is some evidence that incentives work in specific

instances for a small subset of workers, there is little research on
the use of financial incentives in achieving long-term lifestyle
changes like losing weight and not regaining it.

Sending people to your health plan’s website. Surprisingly (at

least to us), many employers think they’ve offered a wellness
program if they direct their employees to a website made
available by their insurer. These under-the-radar programs do not
improve population health unless they are part of a broader
comprehensive health promotion program that offers many ways
to become engaged.

Introducing short-term campaigns. Biggest Loser-themed

events or pedometer challenges are random acts of wellness and
are not very effective. In fact, they may even do more harm than
good by promoting quick fixes as opposed to long-term progress.

Hiring a vendor to “fix” unhealthy employees. Employers

sometimes hire outsiders and call it a day. Worse yet, they’ll
sometimes hire different vendors to address different issues –
lifestyle coaches, employee assistance counselors, case and
disease management vendors, nurse lines, occupational health
and safety experts, workers’ compensation specialists, disability
managers, organizational development consultants, you name it.
When hired independently, these vendors often work in silos,
which can result in overlapping or duplicated work. In addition,
relying on outside entities to attend to organizational needs may
not get at the root of a systematic problem.

So what does? We’ve identified five approaches that, while

comparatively difficult, can actually change the health and lives
of employees for the better.

Leadership commitment and support. A successful health

promotion program starts with a commitment from company
leaders, and its continued success depends on ongoing support at
all levels of the organization. In particular, leaders at companies
with successful programs establish a healthy work environment
by integrating health into the organization’s overall vision and
purpose. At Lincoln Industries, a manufacturer and distributor of
trucking accessories, promoting workers’ health and well-being is
embedded in the company’s core mission and values. Senior
leaders not only speak of its importance to the organization’s
success, they lead by example.

Building a culture of health. A healthy company culture is built

intentionally. It is first and foremost about creating a way of life in
the workplace that integrates a total health model into every
aspect of business practice, from company policies to everyday
work activities. By “total health” we mean a culture that’s
supportive of career, emotional, financial, physical and social
well-being – not just an occasional road race. Examples include
offering flexible work schedules, giving workers latitude in
decision-making, setting reasonable health goals, providing social
support, enforcing health-promoting policies and establishing a
healthy physical environment (healthy food offerings, staircases
instead of elevators, walking trails in and outside buildings and
treadmill workstations).

This, of course, takes time and support. A company like Dow

Chemical is a success story in this way. The company has
promoted a culture of health for more than 30 years, with
countless peer-reviewed studies showing that employees’ health
has improved and company costs have been contained.
Asking for help. A workplace health promotion program cannot
be imposed on workers as yet another management cost-
containment initiative. Boosting engagement in wellness can
only be achieved when workers own the program, understand
how they and the company benefit, and are given a meaningful
voice in its ongoing operation.

There are a few simple ways to start doing this. The most common
approach is to conduct regular surveys or focus groups to
determine which aspects of health and wellness are important to
employees, and which initiatives are not a good use of time.
Honest Tea discovered that employees were not interested in yoga
sessions offered by the company and instead began a series of
vigorous workouts that many of its younger workers wanted. Now
participation exceeds 50% since this change and has helped
workers become more actively engaged in the company’s wellness
program.

Another approach is creating and supporting wellness

committees. These groups of employees can be given a budget to
come up with initiatives supported by their co-workers. Lastly, it
may also be worth involving spouses or other family members
who can help build a broader web of social support.

Spreading the word. Strategic communication leads to greater

engagement in employee wellness programs. This boils down to
getting clear messages out to workers: this is what the program
entails, here is how it works, here’s what’s in it for you, and here are
ways to get involved. This can help overcome some of the top
barriers to program participation and success: lack of awareness,
lack of interest and suspicions about employers’ motivations.

These communications must be frequent, varied in content,

multi-channel, and tailored to the target audience so that it
doesn’t fade into background noise.

For example, USAA describes its communications with workers as

relentless and surround sound. Wherever employees turn, they
are reminded that the company cares about their health and
wants to support their efforts. The messages are clear – this
program is there to serve you, your family and our customers,
whom rely on you to be positive, healthy and performing at a high
level.

Offering smart incentives. As we’ve already noted, simply

paying people to change life-long habits may not work. However,
there is strong evidence that proper incentives drive participation
rates, keep employees engaged and motivated to begin efforts to
achieve self-determined health goals.

The challenge is to migrate employees from simply participating

for a reward (external incentive) to a place where the new
behavior or habit is sufficiently satisfying and worth maintaining
(internal incentive), such as taking a walk daily while listening to
music or a favorite podcast. At NextJump, teams participate in a
weekly Fitness Challenge where virtual cash rewards for the
winning teams are coupled with bragging rights, creating
camaraderie and social cohesion among workers. The company
has found that motivating employees to fit in a workout during
the workday gives them more productive energy and is helping
drive better performance. Employees feel good, are happier,
establish close partnerships with their office mates, and at the
end of the day find work fun and personally rewarding.

Measuring the right things. Program evaluation is critical to

maintaining accountability for a wellness program. To do this
well, develop an evaluation plan at the start of a program so that
useful baseline data collection can occur and be monitored over
time.

So what should you measure? There are generally two answers:

return on investment (ROI) and value of investment (VOI). ROI in
this context is generally limited to examining the tangible
benefits of a program, such as a reduction in medical costs or
absenteeism. Fortunately, a robust scientific literature review
supports the conclusion that well-designed and well-executed
programs can produce a positive ROI along with significant
improvements in population health.
Johnson & Johnson, for example, has published dozens of studies
in academic journals over the past three decades showing its
wellness and prevention programs have improved employees’
health, saved the company millions of dollars and enhanced
workers’ productivity – something they could only conclude after
the smart collection and analysis of data.

In our view, ROI in isolation fails to capture the full benefit of

workplace health promotion. VOI calculations, on the other hand,
allow employers to examine the broader impact of programs and
their impact on core priorities for their organization, which may
include improved employee morale, talent attraction and
retention, enhanced company loyalty and heightened customer
loyalty.

There are a lot of misconceptions about wellness programs out

there. As a result, many leaders pick and choose options fairly
blindly, doing their employees and their company a disservice. In
the end, you don’t necessarily need the latest wearable or a new
vendor. To achieve very real health improvement at the
workplace, employers should first understand what the evidence
says about what works, and then weave together individual health
promotion programs with organizational change interventions
that build on and support a healthy company culture. This isn’t
always easy. But the rewards can be huge, both for your company
and for your employees for years to come.

HT
Hector De La Torre is the executive director of
the Transamerica Center for Health Studies, a
national nonprofit, private foundation and
division of the Transamerica Institute. Through
broad-based analysis and research findings, the
center helps consumers and employers
navigate the financial implications of the
health care decisions they are facing today.

RG
 Ron Goetzel, Ph.D., is senior scientist and
director of the Institute for Health and
Productivity Studies (IHPS), a collaborative
established between the Johns Hopkins
Bloomberg School of Public Health and Truven
Health Analytics. IHPS conducts empirical
research on the relationship between employee
health and well-being, health care utilization
and costs, and work-related productivity.

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Human Resource Management
Meet
That the
Save Wellness
CompaniesPrograms
Money
by Jim Purcell
April 20, 2016

Workplace wellness is under scrutiny by skeptics who argue that

the return on investment (ROI) in wellness programs does not
justify their costs. What’s the truth here? Can wellness programs
help employers reduce out-of-control health care costs? The
answer, most emphatically, is yes. But we must first go beyond
unduly narrow interpretations of ROI (i.e., “claims ROI”), to
understand how properly designed wellness programs can help
employers lower health care costs while providing other types of
cost savings and competitive advantages.
The current ROI debate has focused on whether one type of
wellness program, lifestyle management (diet, exercise, and
lifestyle changes), can reduce health care claims and lead to lower
costs. Here, I agree with critics that lifestyle-focused programs do
not significantly lower claims costs.

But, the real question is not whether wellness programs deliver

returns. Rather, it’s what type of wellness program can reduce
claims and thereby lower insurance premiums. The answer is not
lifestyle programs; it’s programs that prevent at-risk employees
from becoming ill and help chronically ill employees stabilize
their conditions.

A recent Rand study, Do Workplace Wellness Programs

Save Employers Money?, examined 10 years of data from a Fortune
100 employer’s wellness program. When compared against the
lifestyle-management component, disease management
delivered 86% of the hard health care cost savings, generating
$136 in savings per member, per month and a 30% reduction in
hospital admissions.

At-risk employees suffer from factors like overweight, blood

pressure, diabetes, and depression, which can lead to costly (and
avoidable) health claims. At-risk people should be identified
through personal health assessments and biometric testing, and
encouraged — not coerced — to participate in personalized care-
management programs to minimize their chances of becoming
chronically ill.

While keeping at-risk employees healthy is critical, the shorter-

term workplace-wellness ROI lies with the chronically ill, who
suffer from costly conditions like advanced diabetes, heart
conditions, and cancer. In a typical population, they consume at
least 50% of a company’s claims expense, and focusing on them
can make or break your claims ROI.

Enrolling the chronically ill in disease-management programs

that ensure they get appropriate care has the most potential to
reduce insurance premiums. For example, a program that
preempts 25 unnecessary emergency department visits can easily
save $50,000, while preventing four inpatient stays can save at
least $100,000. Savings like these are not unrealistic for a 2,000-
employee company.

Employee buy-in is key. But employers must first realize that they
cannot make employees live healthier lifestyles. Incentives have a
place, but they can’t single handedly drive long-term lifestyle
change. And thinly veiled penalties hurt morale when viewed as a
stealth form of shifting more costs onto employees and do not
contribute to a supportive workplace environment, much less
long-term wellness.

For all of this to work, employees must trust the program and the
employer’s motives, which requires visible CEO leadership.
Transparency is key, and employers should open the books,
showing employees the true cost of health care coverage borne by
the employer, how those numbers have changed, and the
projected trajectory in the future if something doesn’t shift.

And while concrete health costs are important measures of ROI,

we must not overlook the many benefits of fostering greater
workforce health and well-being that can actually exceed claims
ROIs.

According to a 2012 Gallup State of the American Workplace

study, employees with high overall “well-being” have 41% lower
health-related costs compared with employees who are struggling
and 62% lower costs compared with employees who are
suffering.” Another study by Willis, Towers, Perrin supports this
finding that more employers enjoy major financial returns and
competitive advantages through higher employee engagement,
productivity workplace morale.

As these studies show, the current ROI debate misses the bigger
picture. Any CFO knows that businesses invest in many things to
improve workplace environments without justifying these costs
with an ROI study. Thus, when workplace wellness is viewed
holistically without ignoring or undervaluing the total return on
wellness beyond reduced claim expenses, companies can expect
reduced absenteeism and presenteeism, greater employee
 engagement and productivity, less unscheduled paid time off,
fewer workers’ comp claims, greater employee retention,
increased employee satisfaction and morale, and demonstrable
competitive advantage.

Given the absence of other alternatives, it’s time to correct course

and double down on workplace wellness. When done right,
workplace wellness offers both near- and long-term financial and
competitive returns and provides an alternative to the toxic, zero-
sum game of reducing health coverage and increasing employee
insurance costs. This is an opportunity that cannot be missed.

JP
Jim Purcell is the former CEO of Blue Cross &
Blue Shield of Rhode Island. He currently
advises large employers on workplace wellness
strategies.

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