The Problem with Measuring the ROI of Benefits

You’ve been asked to calculate the ROI for the company’s benefits—an all-but-impossible task. Now what?

By Steve Bates Aug 25, 2016
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​“It is health that is real wealth and not pieces of gold and silver.” That notion is from the Indian leader Mahatma Gandhi. Perhaps with that message in mind—or a modern twist that maintains that health can actually translate into gold and silver—the Cleveland Clinic invests substantial money and effort into supporting the well-being of its workers. Key priorities include encouraging its 49,000 employees and their dependents to stop smoking and lose weight because study after study shows that these changes make people healthier, and fitter workforces may mean a healthier bottom line. 

But can the medical center prove it is getting its money’s worth on its investment?

On the surface, it would appear so: Even after factoring in rising medical costs, the clinic’s total health care spending on its workforce has declined about 2 percent in the past year. Moreover, its programs are performing well compared to a handful of competitors’. But there are aspects of its wellness benefit that simply defy definitive statistical analysis. That’s because, in the real world, it is nearly impossible to show with any certainty the impact of a single variable like smoking on broad outcomes such as overall costs.

​“We know that we’re saving money vs. our competitors and vs. the cost trend,” says Michael F. Roizen, M.D., the Cleveland Clinic’s chief wellness officer. “Do we know that reduced smoking is the cause? Do we know that the savings are improving productivity? Absolutely not.”

And that’s the problem with trying to measure the return on investment (ROI) of wellness programs and other employee perks: While CEOs and other senior executives often pressure HR to produce hard numbers showing the value of company benefits, trying to calculate that number to the penny may be a fool’s errand, even for large employers with a wealth of data at their fingertips. 

“It’s very difficult, even for big companies,” says Michael Wesson, an associate business professor at Texas A&M University.

What’s more, traditional shortcuts to assessing the value of benefits, such as so-called benefits ROI calculators, are falling out of favor in the face of evidence of the complications in finding valid numbers. “You don’t just plug in a couple of data points and get a return,” says Scot Grooms, president of Tampa, Fla.-based consulting firm Grooms Benefit Solutions.

This puts HR professionals who have been tasked with demonstrating ROI in a difficult position. Most practitioners firmly believe that comprehensive benefits lead to engaged, productive and healthy employees—not to mention a competitive edge when it comes to recruitment and retention—but they can’t prove it. 

Yet at the same time, the challenge of measuring benefits brings with it a tremendous opportunity for HR professionals—to educate their leaders, and their workforces, about the limitations of ROI analyses and to make “softer,” more nuanced cases for why offering strong health benefits and other perks is critical for their company in today’s business environment. A key point to make: Just because something can’t be easily measured doesn’t mean it has no value.

Leap of Faith

​In recent years, research has given a mixed picture on the hard-dollar value of employee benefits. One study in the January 2016 Journal of Occupational and Environmental Medicine found that companies that invest in workforce health enjoyed 235 percent stock appreciation over six years compared with 159 percent for other companies. Another indicated that organizations with effective wellness programs retain employees at a far higher rate than those with ineffective programs. Some wellness vendors even promise at least a $3 return for every $1 you spend with them.

But a 2013 Rand Corp. report concluded that wellness programs have little immediate impact on health care costs, adding that it takes, on average, five years to break even on such efforts.

Other benefits, such as financial education programs and employee recognition initiatives, can be even more difficult to analyze for financial return than health benefits, for which data is relatively plentiful.

​One thing we do know: Employees hold benefits in high regard. In fact, benefits are the third-highest factor contributing to job satisfaction, after respectful treatment of employees and compensation, according to a 2016 Society for Human Resource Management survey report. In private industry, benefits account for 30 percent of total employee rewards.

There is also ample circumstantial evidence demonstrating the value of benefits. Tentative conclusions can be drawn—and benefits investment choices made—based on initial results, such as a reduction in the number of smokers or an increase in employees’ weight loss following the implementation of a wellness program that targets those variables. But it’s important to recognize, and to communicate to others, that doing a more thorough analysis can take a lot of hard work and time, and even then your conclusions may be less than scientifically definitive. 

Many companies are taking informed gambles that new benefits offerings will produce the outcomes they desire. 

Take the case of Hillenbrand, a large manufacturing company based in the Indianapolis area that established its own health clinic at one of its locations in an effort to curb medical expenses. It collected two years’ worth of data and found an 18 percent reduction in insurance claims at the plant with the clinic, prompting it to consider establishing a clinic at another of its locations. Of course, Hillenbrand’s leaders knew there was no guarantee that the success at the first clinic was sustainable or that it could be replicated in a different city, says Phil Daniels, vice president of Indianapolis-based benefits consultant Springbuk, which helped Hillenbrand manage its health care spending. Still, the preliminary results were compelling enough to convince the company to approve an expansion to Cincinnati, particularly in light of the increase in health costs nationwide in recent years; the new clinic has not opened yet.

At the end of the day, Hillenbrand’s decision to move forward was a leap of faith. Many companies are taking similar informed gambles that new offerings will produce the outcomes they desire, whether it’s an employer offering a stress management program for call center employees in the hope of improving attendance or a hotel adding safety training to cut workers’ compensation costs.

While many boards, CEOs and CFOs may insist on definitive ROI numbers to justify adding new benefits offerings, it’s up to HR to communicate the substantial challenges involved in making precise calculations. Finding the right data and methodology is hard enough, and that’s not even considering all the other factors that can influence the quality of the information and reliability of the computations.

For example, shifts in the economy and in organizations’ financial health impact the effectiveness of benefits spending, as do changes in the job market and workforce demographics. State and local laws mandating certain benefits vary significantly. Moreover, it’s next to impossible to quantify the impact of benefits on intangible goals such as recruiting the best talent or aligning with company culture. “Every employer is going to see a return on benefits differently,” Grooms says.

Analysis can get particularly sticky when HR tries to compute ROI for training and development initiatives. You can measure participation and promotion rates. But with employees coming and going and so many other factors involved, any attempt at calculating a precise return is dicey.

Even more daunting is trying to pinpoint the ROI of retirement programs. Market volatility and employees’ potential lack of interest in, and knowledge about, finance limit the validity of even the most robust analyses. Benchmarking against the competition or national statistics provides some insight, but what if most companies are overpaying for their benefits?

How to Move Forward

Given the uncertainty—and yet the importance—of determining the value of benefits, what’s an HR professional to do? For one thing, it’s crucial not to let perfect become the enemy of good. In other words, it’s likely better to make informed decisions based on what you know than to become paralyzed by what you don’t. Here are some guidelines to help you assess the worth of your organization’s benefits.

Communicate what you have. If a benefit isn’t being utilized, don’t immediately assume it isn’t valued. Some benefits have low visibility because HR isn’t doing the best job of communicating about them. “You might have good benefit programs, but if no one knows about them, you’re not going to get bang for your buck,” says David Ratcliffe, a principal with Xerox HR Services in Washington, D.C.

A good way to convey the value of a benefits package to your workforce is by using a total rewards model in which salary, bonuses and benefits are combined into a dollar value and explained to employees through the accounting method known as net present value. That’s the long-term value of the package in today’s dollars. A worker might have an annual salary of $80,000 but total rewards worth $180,000.

​“Use the lens of the employee—how they look at this,” says Larry Montan, director of sales force effectiveness with Deloitte in Minneapolis. “It might not scratch the itch” to demonstrate ROI to the C-suite, but given the intense war for talent, the employee perspective can’t be ignored. “Employees vote with their feet.” 

Know your employees. To make sure you’re not spending money on programs that employees don’t  value, conduct surveys and convene focus groups around benefits. Ask questions. “Talk to your people. What’s working? What’s not?” says Carl Hess, North America co-leader for consulting firm Willis Towers Watson in New York City. And don’t do everything by e-mail. Interacting with employees “forces a common vocabulary” for the process of examining benefits, he says. 

Many organizations are seeking a balance between the perks that employees want and the ones the company can afford, says Malinda Riley, a principal with Korn Ferry Hay Group, a consultancy in the Chicago area. “Research shows that the most admired companies have that balance right,” she notes. “If your workforce is engaged and enabled, the amount of discretionary effort you get is measurable.”

Keep in mind that what works for a company with mostly Millennial employees or in an urban environment might not work for an organization with an older workforce or one that is in a rural location. That’s why some Silicon Valley tech firms in high-cost cities are offering housing subsidies to attract and keep top talent, while companies with older workers often provide robust retirement and health care options. 

Link benefits to business needs. Partner with finance and other departments to establish priorities and determine what to assess. It’s critical to identify business needs and explore how benefits can influence desired outcomes. “Listen to business leaders,” advises LuAnn Heinen, vice president of the National Business Group on Health, who is based in the Minneapolis area. “Benefits should not be a silo. Partner with safety or CSR [corporate social responsibility] or recruiting or marketing.”

Define what to measure. Identify potential opportunities for return and look for related metrics, advises Ray Baumruk, a partner with consulting firm Aon Hewitt based in the Chicago area. A small company that has offered a smoking-cessation program for just one year will likely have limited data, but its HR team can supplement those data with national statistics showing a positive impact on employees’ health and medical costs after they stop using tobacco products.

“Try to find a tendency” in the data, Baumruk says. Maybe you can show that absences are down, that productivity is up and that employees rate their benefits highly. “You might not be able to prove causalities,” he notes, but HR can discuss the data points as part of a broad narrative that supports benefits spending.

It’s critical to identify business needs and explore how benefits can influence desired outcomes.

Recognize that not all statistics are equal. Measuring participation in a benefits program can be a tool for assessing employees’ preferences or knowledge about it, but it is probably not as valuable for determining the desired outcome of a program—say, its recruiting value or impact on health care costs. And demonstrating the correlation between a good program and a good outcome can be hard. Companies that invest in workforce health might have better stock returns than other firms, but one can’t assume from that information alone that wellness programs cause better financial results. Perhaps businesses whose stock prices rise have more cash to invest in health initiatives.

Get outside assistance. Help from vendors, consultants and other experts is always an option, particularly when HR professionals feel that they need assistance determining what data are useful and what is noise. Starting on the right foot can save a lot of time and energy.

Data Overload

It’s hard to believe that, in the age of “big data,” it’s not easier to prove the effectiveness of benefits. “There’s so much data, so much insight people have at their fingertips,” Montan says. And yet in most cases, crunching the numbers can’t confirm with certainty whether a company would do better to invest in a 401(k) plan match or foosball tables.

 “The science is pretty good. Applying that science is very, very difficult,” says Thomas Parry, president of the Integrated Benefits Institute, a San Francisco-based nonprofit.

The most important thing is not to give up. When you can’t prove the dollar value of a particular benefit, keep digging for relevant data and insights. In the meantime, you can’t go wrong by trying to do right by your employees.  

Steve Bates is a freelance writer in the Washington, D.C., area.

Illustration by James Fryer for HR Magazine

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