How high inflation has affected benefits and reward strategies
Employee benefits are not immune to inflationary pressures, particularly in healthcare and insurance. The rise in benefit costs may well outpace headline inflation, with some predicting medical inflation as high as 18%, stemming from a mix of factors including medical innovations, operational expenses and increased claims.
This inflationary trend has deep implications and puts pressure on businesses already grappling with talent shortages and broader economic challenges. The need to balance benefit strategies against surging costs has become a key aspect of shaping the employee value proposition (EVP).
Surprisingly, recent research Howden conducted in partnership with the Reward & Employee Benefits Association reveals a significant trend: despite the uphill cost trajectory, very few employers are reducing their benefits funding or failing to deliver on their intended plans from the past three years.
In fact, nearly two-thirds are actively enhancing their benefits funding, especially for lower-grade employees and in terms of health and protection. Undoubtedly influenced by the pandemic, this movement aims to ensure a fair and supportive offer to all employees. This highlights that benefits remain a vital part of the EVP for many.
Employer impact
The impact of escalating benefit costs and wage inflation doesn’t generate consistent employer responses – the action businesses are taking varies significantly based on business size, sector and other dynamics.
Large-scale enterprises often absorb these costs as part of their operations. Conversely, smaller firms confront challenging decisions about affordability, prompting difficult questions about resource and money allocation.
The current cost-of-living crisis adds to employers’ challenges, triggering debates over whether prioritising wage increases or boosting benefits would yield more impact. For instance, in hospitality, logistics and manufacturing where wages are often low with many employees on the minimum wage, any increase in pay will have a big impact, even if there is an appetite for offering more benefits.
The government’s recent announcement to increase the national living wage by more than £1 to £11.44 per hour from next April and lower the age this kicks in is welcome, but for smaller firms it adds even more costs to their already stretched budgets and means benefits and other elements of reward may fall behind.
Unsurprisingly, in sectors such as financial and professional services, employers are facing different decisions. They need to strike a balance between salaries and benefit expectations within their sector to stay competitive and attract the best talent – as a result, reward spending is considered as one budget and allocated as needed.
The path ahead
Looking ahead, employers need to make a critical reassessment of the value of their benefits to their business and workforce. Those who feel that benefits are a priority need to assess their specific employee and business needs, review their existing provision and fill any gaps that are identified.
This may mean increasing benefits at the expense of pay reviews if it enables them to better meet long-term corporate goals. Employers will need to plan and budget for rising benefit costs, but if the business value of the benefits is understood then it becomes a necessary expense.
For companies that don’t consider benefits to be as important as wages, they could still consider cost effective alternatives such as investing in wellbeing initiatives, or offering access to virtual GPs or screening programmes, which can have a tangible effect with minimal budget.
Navigating employee expectations and grappling with inflation’s effects on benefits present a pressing dilemma for businesses. It demands a strategic, nuanced approach acknowledging the key role benefits play in attracting and retaining staff, while diligently managing costs.
The key is for HR and reward professionals to know their employees, manage their stakeholders and be aware of their benefit gaps. This will enable them to make informed decisions tailored to the workforce that will deliver the greatest impact.
Howden Employee Benefits & Wellbeing can help organisations design and implement an employee benefits programme that will align with an organisation's goals and values. Click here for more information.
In partnership with Howden Employee Benefits & Wellbeing
Howden provides insurance broking, risk management and claims consulting services, globally. We work with clients of all sizes to provide dedicated employee benefits & wellbeing consultancy.
