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Benefits Versus Cash

Dear Dave
Our company has been discussing what to do about the rising cost of continuing to provide benefits, especially, medical insurance. We offer employee and family medical, disability, and profit sharing. We have been doing our best to shop our insured plans around at renewal time, but we’re not getting much relief.

At the same time, we are finding it harder and harder to hire new staff. First, we can’t always find the quality of people we need, and even when we do, the salary demands often exceed what we are paying our existing staff. One of our owners has suggested we change course altogether and cut back on benefits in general and use whatever savings we may be able to generate to raise what we can afford to pay existing staff and offer new hires in starting salary. Does this work?

Dear JL
It can, but it really varies from one person to the next and from one firm to the next. Younger staff members have a tendency to be more cash oriented, while older staff generally lean more towards benefits. Needs and priorities typically change as we get older.

I have a client who did something similar to what your owner suggested a couple of years ago with good results. They researched the potential economics and then surveyed their staff to explain the issues and options and asked for input on what staff would prefer the company do. In this particular case, the message came back loud and clear to "show me the money". They ultimately cut back to a barebones, high deductible major medical plan, ended their practice of paying yearend discretionary bonuses which they had been doing for a number of years, and eliminated the company match on 401K plan contributions. They’ve used the resulting savings to raise salaries for existing employees by around 20% across the board, as well as to increase the starting salaries being offered to prospective new hires.

So far, their choice seems to be working for them. Not everyone at the firm is happy, but paying more in salary and less in benefits and bonus has helped with recruiting and also with overall retention. Many new hire candidates are typically skeptical when it comes to valuing the promise of a subjective yearend bonus (even if you can demonstrate that you have consistently paid bonuses over a number of years) when considering your employment offer, so converting bonus to salary can be a plus.

Before you do something as drastic as this firm, I would strongly recommend you do what they did and do your research first, and then talk to your staff for input. It would be wise to approach this as a joint decision made in an informed way through a process of management and staff collaborating together. Also, be sure to look at some intermediate strategy such as a cafeteria style benefit plan where you can give your staff a specific dollar budget (and therefore fix the company cost) against which each staff member may pick and choose the benefit package that is best suited to their needs and kick in their own additional money to pay for benefits that are too costly for what your firm is willing to provide.

Wahby and Associates