Why financial scarcity by staff needs to change benefits design

Do you remember the last time you had a pressing deadline, and were stuck in an unrelated meeting, simply itching to get out? Do you remember how much you absorbed in that meeting? How valuable you were to the meeting’s goals?

Don’t worry, we’ve all been there…

This is just one simple example of the consequences of a phenomenon two US academics, Sendhil Mullainathan and Eldar Shafir, describe in their book Scarcity: The true cost of not having enough.

Scarcity theory states that having less of something than you feel you need (time, in the example above) has a significant negative impact on your cognitive abilities. The authors state that this impact has two principal elements:

First, scarcity narrows our focus

This tunnel vision can sometimes be a good thing – we all know the productivity bump a deadline creates. But it can also be highly detrimental: by focusing on one problem, we inevitably fail to think about the consequences of neglecting others. For instance, we take out a high-cost loan today because we’re focused on the need for cash now, but we ignore how we’re going to pay for it tomorrow.

Second, scarcity reduces our mental abilities

The authors call our mental abilities bandwidth, and they use it to mean two things:

our cognitive capacity: our ability to solve problems – this reduces in times of high scarcity; and
our executive control: our ability to restrain impulses – this also reduces as scarcity increases, meaning immediate rewards are valued much more highly than future ones, even if future rewards are objectively better.

If we assume that all employees experience financial scarcity of some form, these principles have enormous relevance to the benefits world. For example, by narrowly focusing on a need to build savings, an employee may not take out an income protection policy that could end up being of enormous value.

Similarly, it’s hard for employees to exert executive control and resist spending their money today if the long-term benefits of contributing to a workplace pension aren’t clear.

So, how can benefits providers design their products to address these challenges?

Step 1: Minimise the negative consequences of narrowed focus

We need to design products that insulate people from the negative consequences of focusing on their immediate needs. Auto-enrollment is a great example of this, and comparable opt-out approaches could be extended to a range of other benefits too. Similarly, granting access through the workplace to fairly-priced financial services (e.g. debt, advice, investments) can minimise the consequences of focusing narrowly on immediate needs.

Step 2: Make products simple, and the benefits immediately apparent

Providers need to minimise the consequences of reduced mental bandwidth. This means creating products that are easy to understand and whose benefits are abundantly clear, even in times of high scarcity. Simplicity, transparency and clarity should be watchwords for us all as we design and implement benefits.

The consequences of scarcity for benefits providers are clear: we need to design products that are better suited to the needs of the people we’re trying to help. If we do, we’ll help employees overcome the challenges they face, help employers achieve their benefits goals, and drive uptake for our products as a result.

Patrick FitzGerald is head of partnerships at SalaryFinance.

This article was supplied by SalaryFinance.