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Small Business Employee Benefits and HR Blog

Which Benefits Have the Best Effect on Employee Retention and Recruiting?

Small business benefit options have never been more varied. Get the most mileage from your offerings with the benefits employees love best.

The U.S. job market continues to grow. According to a recent report from the Which Benefits Have the Best Effect on Employee Retention and Recruiting?Bureau of Labor Statistics, businesses in the country added 209,000 jobs in July, marking the 82nd straight month of job growth. At the same time, the unemployment rate shrunk, ticking down to 4.3 percent—its lowest mark since 2001.

These new metrics have led many economists to speculate that the economy is nearing “full employment,” meaning everyone who wants a job in the United States has one. This mark is a significant one, particularly for small businesses. With no spare workers, they need to boost their offerings to hire and keep their employees.

Benefits are one of the surest ways to improve employee satisfaction. Nearly 60 percent of employees say benefits are “very important” to how they feel about their job and their company, and employees who are satisfied with benefits are almost four times as likely to be satisfied with their jobs.

But with a proliferation of benefits now available, how do small businesses—with their typically limited budgets—make decisions that are most likely to help them with employee retention and recruiting?

In this post, we’ll go over six common forms of employee benefits and how well they answer a small businesses’ needs.

1. Wage increases

Dismayed by the cost and complexity of traditional group benefits, many small businesses choose to forgo these offerings and instead raise employees’ wages.

While wage increases can be vital in increasing employee satisfaction—and thereby recruiting and retention rates—they can’t make up for the value businesses lose by not offering formal benefits.

First, wage increases’ positive impact on employee satisfaction is limited. A Glassdoor study found that while an increase in employee pay has a direct effect on employee satisfaction, there is a diminishing return to happiness for every extra $1,000 in earnings. For example, an employee earning $40,000 a year with 77 percent job satisfaction would see a satisfaction increase to 78 percent if their company raised their wages to $44,000. However, the employee’s increase in job satisfaction would be smaller if their company had raised their wages from $120,000 to $132,000.

Second, even though businesses may raise wages in hopes employees will spend the extra money on benefits, there’s no guarantee employees will do so. In fact, employees are unlikely to consider wage increases a substitute for benefits.

In this scenario, employees still believe their company doesn’t offer benefits. And without benefits, job seekers as well as current employees are likely to look for work elsewhere. One-third of the workforce has turned down a job due to a lack of benefits, after all, and two-thirds of employees say they would leave their job if they were offered another position with better benefits.

2. Traditional group health insurance

Customarily, a group health insurance policy is the largest piece of a business’s benefits package—and for good reason. Not only is group health insurance the most expensive employee benefit, but it’s also the most valued by employees.

Across all generations, employees say health insurance is the most important benefit their company can offer. A full 40 percent of employees in a Glassdoor survey ranked health insurance as their most-preferred benefit, edging out vacation (37 percent) and performance bonuses (35 percent).

Unsurprisingly, the link between health insurance and recruiting and retention is strong. More than 45 percent of employees told Towers Watson that their company’s health benefits were an important reason they decided to work there, and 55 percent say these benefits are an important reason they stay with that company.

What’s more, improving health insurance offerings is the easiest way to raise employee satisfaction. According to another Glassdoor survey, increasing employees’ satisfaction with their health insurance by one star (out of five) is associated with a 0.34-star increase in average satisfaction with the company. That’s a higher increase than those associated with retirement plans, vacation, employee discounts, and maternity or paternity leave.

However, group health insurance isn’t without its problems. In order to increase employee satisfaction, small businesses need to offer the kinds of policies employees want. The policy also needs to provide value to most, if not all, employees.

Unfortunately, there’s significant evidence suggesting group health insurance is too one-size-fits-all to satisfy either requirement.

First, average participation in company-sponsored health insurance plans is low. As of last year, just 37 percent of employees working for small businesses participated in their company’s plan. This suggests that the policies these businesses offer don’t sufficiently meet employees’ needs.

Second, 80 percent of employees say that having health benefits customized to meet their needs is important to their satisfaction. Yet the average small business offers only two policy choices to each employee through group health insurance.

Finally, businesses are increasingly opting for high-deductible policies and more employee cost-sharing as a way to deal with rising costs. This leaves employees feeling less satisfied with their benefit—currently, only 32 percent of employees agree their group health benefits are “definitely worth” the cost—and, therefore, less satisfied with their jobs.

3. Retirement benefits

Retirement benefits, such as a 401(k) or defined benefits plan, are growing increasingly important in recruiting and retaining employees.

According to Towers Watson, 35 percent of employees say retirement benefits were an important reason they decided to work for their current company. Another 47 percent say these benefits are an important reason they stay with that company.

Retirement benefits are also growing in importance, particularly for young people. Between 2009 and 2011, the percentage of workers younger than 40 who told Towers Watson their retirement program was an important factor in accepting their job jumped from 28 percent to 63 percent.

Like health insurance, improving retirement benefits has a positive impact on improving employee satisfaction. Glassdoor found that for every 1-star increase in retirement benefits ratings, employees experience a 0.08-star increase in satisfaction with the company.

Yet retirement benefits face many of the same problems as health benefits. As small businesses have faced tighter margins, they’ve looked for ways to trim costs, and both 401(k)s and defined benefits plans have felt the pinch. As a result, employee satisfaction has dropped.

Employees at companies that reduced their 401(k) matching contributions were less likely to want to stay at that company until retirement than employees whose companies hadn’t reduced contributions (58 percent versus 66 percent), according to the Towers Watson survey.

Similarly, employees at companies that drop definite benefit plan accruals are less likely than those whose company made no changes to value their retirement benefit as a reason to stay at the company (33 percent versus 38 percent).

4. Transportation benefits

Though small businesses may not realize it, commuters in major American cities spend more than an entire workweek delayed in traffic every year. Even in smaller urban areas, traffic congestion has increased. Commuting is so painful, in fact, some employees have considered changing jobs in an effort to avoid it altogether.

In this environment, transportation benefits are a valuable employee offering that can have a positive impact on recruiting and retention rates.

According to a U.S. Environmental Protection Agency report, employees who work for companies that “minimize the stress and expense of commuting find their companies to be more attractive places to work.” In fact, 86 percent of American workers consider commuter benefits “beneficial and useful.”

Whether through discount transit passes, ride-sharing boards, parking benefits, or reimbursements for public transportation, small businesses who offer transportation benefits can expect increased job satisfaction from employees.

What’s more, just 17 percent of employees have access to transportation benefits. With less competition, offering transportation benefits is likely to make more of an impression.

5. Education benefits

Nearly a third of employees report that educational assistance from their company is “very important” to their job satisfaction. This is particularly true for women, younger people, and those who have attained some degree of higher education.

The education benefits associated with the highest degrees of employee satisfaction are tuition reimbursement programs and paid job training. More than 40 percent of employees say paid job training is “very important” to their satisfaction, and tuition reimbursement is currently employees’ third-most-desired employee benefit.

The importance of education benefits to recruiting and retention has also increased over the years, from 24 percent saying education benefits are very important to their satisfaction in 2011 to 31 percent saying the same thing today.

Yet, much like health and retirement benefits, businesses must improve their education benefits offerings. Just 55 percent of employees receiving education benefits report being satisfied with them.

Higher allowance amounts and more tailored benefits—like tuition reimbursement—are important ways to increase the effectiveness of education benefits in recruiting and retention.

6. BYOD

Employees are increasingly using personal electronic devices in the workplace. According to a 2015 report from Tech Pro, 75 percent of companies permit or plan to permit bring-your-own-device (BYOD) programs in the workplace.

Under these programs, employees use their personal devices at work for work-related reasons. Companies may or may not also reimburse employees for costs associated with these personal devices.

BYOD programs are extremely popular with employees, with 78 percent of workers saying that using a single mobile device helps them balance their personal and professional lives. This flexibility plays greatly into employee satisfaction. More than 80 percent of workers with access to flexible IT workers reported satisfaction with their jobs, according to Deloitte, compared with 62 percent who don’t have flexible IT conditions.

Satisfaction also increases with company contributions to device expenses, such as reimbursements for a monthly smartphone bill.

An alternative option: personalized benefits

While each of these employee benefits has a positive impact on recruiting and retention, they also suffer from budgetary limitations. After all, very few small businesses can afford to offer health, retirement, transportation, education, and BYOD benefits.

What’s more, small businesses opting for traditional group benefits must make one-size-fits-all policy choices in critical areas like health and retirement. Offering multiple policy choices or finding a single policy that provides value to each employee is rarely, if ever, possible.

Some of these benefits are also complex. Few small businesses have the time or desire to interpret dense policy language and deal with renewals each year.

To eliminate these problems, many small businesses are offering personalized benefits.

Under a personalized benefits platform, small businesses set aside a certain amount of money per employee per month. Employees then use that money to select and pay for the services that provide them with the greatest value. Depending on the framework the business sets up, employees can choose to put that money toward health insurance, retirement plans, commuting, education, or their personal devices they use for work.

Because small businesses control the amount of money they put toward benefits under this platform, personalized benefits can save companies as much as $5,000 per year per employee. personalized benefits also eliminates one-size-fits-all compromises and lessens benefits complexity.

At the same time, personalized benefits still answers small businesses’ core need—to hire and keep talented employees.

Because personalized benefits provides a structured framework for offering and receiving benefits, employees perceive personalized benefits as a true benefit that provides real value.

personalized benefits also answers employees’ larger needs. Nearly 75 percent of employees say having benefits customized to meet their needs is an important consideration in a new job, and 88 percent say having choices that allow them to customize their benefits package increases their job satisfaction.

With more control in selecting their own benefits, employees are more likely to be satisfied with their benefits package. They’re also more likely to accept a job offer and stay with a company that allows that control.

While each small business must judge which benefits will be most valuable for them, personalized benefits offers a route out of common benefits conundrums and allows small businesses to meet the current talent war with a unique and formidable benefits offering.

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