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Employee benefits: Why are they important?

Last updated

5 September 2023

Author

Dovetail Editorial Team

Reviewed by

Shawnna Johnson

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Companies fail or succeed depending on the strength of their staff, and good employee benefits are essential for keeping teams motivated and happy. From medical coverage and retirement support to overall employee satisfaction, the right employee benefits package can sometimes be more valuable than a role’s base pay.

Learn about how employee benefits can maximize productivity and ensure employees are proud to present their best work with minimal distractions. This article will also outline how employers and employees can secure optimal benefits and succeed in fulfilling company-wide and individual career goals.

What are employee benefits?

Employee benefits are any form of compensation that employers provide in addition to base pay or other indirect financial compensation.

Broadly, benefits are the “perks” of employment. They are often calculable in financial terms and can significantly offset various living costs. As such, they play a crucial role in supporting staff well-being and building a high-functioning company culture.

The four major types of employee benefits

It’s helpful to categorize employee benefits into the following categories:

1. Health and wellness

Health insurance is one of the most sought-after and expected benefits that employers offer. Insurance comes in many forms, and employers and employees typically share the cost. However, some insurance benefits are 100% employer-paid.

Here are the most common health and wellness benefits:

  • Medical (including primary care and hospital/emergency care)

  • Supplemental (for more specialized or alternative practitioners)

  • Dental

  • Vision

  • Life insurance

  • Employee Assistance Program (EAP)

  • Mental healthcare

  • Worker’s comp

  • Health Savings Account (HSA)

  • Gym memberships

  • Injury and disability insurance

2. Financial

Providing for an employee’s financial well-being creates security and comfort today and in the future. Employees can save for their future through many programs, and employers share the investment. Here are some popular financial benefits:

  • Matching 401k plans

  • Pension

  • Merit increases

  • Roth IRAs

  • Pensions

  • Signup bonuses

  • Sales commissions

  • Stock options

  • Company discounts and free products

3. Work–life balance

Employees today expect to be able to balance their work and life priorities. Work–life balance dramatically improves with a robust combination of:

  • Vacation and holiday time

  • Paid time off

  • Parental leave

  • Sabbaticals

  • Continuation of benefits and job security during extended time off

  • On-site amenities (exercise equipment, food and drink, on-site daycare)

  • Lifestyle perks (memberships, training, recreation opportunities)

  • Moving expenses

  • Work/efficiency equipment (computers, phones, internet service)

4. Development and recognition

The chance to improve your advancement opportunities and professional skills with your current employer is a great benefit. Often, companies offer this in an attempt to boost employee loyalty and help them improve their chances of being promoted. In multi-faceted industries, businesses may even want certain employees to work with other companies to develop their skills.

Some of the most common development and recognition benefits include:

  • Training and mentor programs

  • Bonuses and incentives

  • Career planning

  • Financial planning

  • Career-building networking

Why do employers offer benefits to employees?

Companies also benefit from offering the right employee benefits packages. They play a vital role in boosting a company’s market value and staff efficiency.

Here are some of the ways offering employee benefits is advantageous to companies:

  • The ability to attract higher-value employees

  • A more competitive stance in the marketplace

  • Staff engagement, loyalty, pride, and satisfaction

  • Better employee longevity and retention rates

  • Employee health and well-being

  • Overall cost reduction (if the company makes effective use of its mass-buying power)

Sometimes, employee benefits are what prospective employees consider most. This is especially true for those with large families or preexisting medical conditions. The closer you get to retirement age, the more employees tend to think about retirement benefits.

How employee benefits impact work performance

It’s no secret that satisfied employees are more committed to their company’s success, not just their own. Employee benefits mean their most essential physical needs are met, which helps reduce external distractions during working hours. Psychologically, staff are less likely to keep an eye out for better opportunities, “quiet quit,” or allow their focus to drift.

How much do benefits cost?

The cost of employee benefits largely depends on the following factors:

  • Number of employees

  • Extent of the benefits

  • Range of benefits options

  • Whether the benefits create more expense for:

  • The company’s general funds

  • Investment funds

  • The employees (higher deductibles and other out-of-pocket expenses)

  • Third parties, including insurance companies or investment firms

By comparing the cost of benefits with changes in productivity, employers can determine the ROI of a given benefit or benefit strategy.

Calculating the total cost of a benefits package also requires clarity on:

  • Overall expenses

  • Expense(s) per employee

  • The different types and costs of benefits for different tiers or levels

Managerial benefits are often significantly greater than salaried worker benefits. Meanwhile, C-suite benefits are in a class of their own.

Management should also consider the cost of benefits compared to the cost of replacing a high-valued employee. Staff longevity is another factor that might result in higher benefits costs for certain groups of employees.

An employee’s benefits may increase or decrease alongside their trajectory within the company. 

For example, a regular employee who becomes a manager might become exempt from overtime pay but receive greater benefits (and salary). In this case, the calculation becomes a little more complex, although the benefits and payroll costs are usually higher.

How to determine benefit costs per employee

So, how much does each benefit package cost? And how do you find the sweet spot to keep employees functioning in top form without losing profitability?

There are generally two approaches to calculating benefit costs per employee:

1. Calculating benefits as a share of total company resources

This approach involves setting a specific amount for company-wide benefits. The company (typically the HR and finance departments) attempts to meet all employees’ needs by seeking the best value on company-wide benefits.

When these benefits are given relatively equally to a group of employees, you can use the following equation:

Benefit costs per employee = total cost of the benefits ÷ the number of employees

2. Calculating each employee’s exact benefits

More complex benefits packages involve considering several factors when calculating the cost of any given employee’s benefits package. These are the following:

  • Number, type, and extent of each benefits program purchased

  • Number of employees participating in each program

  • Cost per program and service

  • Frequency of each benefit’s use and how it affects employer costs

  • Estimated valuations of benefits that are hard to quantify (such as investments or stock-related benefits)

The company’s size, available liquidity, and how easy it is to attract skilled employees in its industry affect which approach a company will use to calculate benefit costs per employee.

In practice, most mid-market companies should consider both overall resource limits and cost limits per employee. This is also true for companies providing a range of benefits options, where each employee’s total benefit costs can vary widely. In most cases, total benefit costs and costs per employee are calculated separately.

Best employee benefits

From an employer’s perspective, selecting the best employee benefits involves knowing your market and workforce. You will need to research:

  • Worker demographics

  • Your employees’ most common needs

  • The competitiveness of your market

  • Industry standards and shared expectations of your prospective talent pool

Individual employees value benefits differently, which makes valuing benefits quite challenging for employers.

Analyzing these matters in full using your own market/company data will reveal the benefits that are most valuable to your current and prospective employees. Surveying your current staff can help tremendously and give you the answers you need to make the best decision.

Choosing the best employee benefits

Tips for employers

Company directors—including the CFO, general managers, and HR—should meet and discuss the following when choosing benefits:

  • Size of company

  • Budget set aside for benefits

  • How much buying power the company has in the marketplace to attract the best deals (insurance, for example)

  • Whether to offer a uniform benefits package to all employees or provide customization

  • Employee needs

  • How the benefits can be measured in terms of their positive impact on employees

  • Research methods to ensure company benefits are cheaper for employees than third-party options

Tips for employees

Take full advantage of any chance to negotiate for higher benefits. Chances are, if an employer is willing to offer more pay than a competitor, they will also be willing to extend better employee benefits.

Consider the following when trying to maximize employee benefits:

  • Which benefits will support your current and long-term career goals (and which won’t)

  • Desired balance between pay and benefits

  • Expected working conditions

  • The value of each benefit to other people in your life

  • Risk tolerance (for example, when you have stock in a brand-new company)

  • The true cost savings of any given benefit compared to what you would pay individually

Consider the negotiation process an opportunity to learn more about the company and decide if their goals align with yours.

FAQs

What are the most common benefits offered today?

According to market analysis from Forbes Advisor, the top four employee benefits offered in 2023 were:

  1. Healthcare (employer-covered)

  2. Life insurance

  3. Pension, retirement

  4. Mental healthcare

  5. Flexible work schedules

Remote-specific benefits are becoming a more typical expectation. This reveals that employees are becoming more concerned about boosting their work–life balance.

Employers and benefits providers can look at the push and pull between these competing demands to understand which benefits trends will prevail in the future.

What do most employees look for first in company benefits when considering employment?

Research by Forbes revealed that 54% of employees surveyed were satisfied with their benefits, while 40% of employers believed their staff would leave for greater benefits from competitors.

Ideally, an employee and employer will agree on which benefits are best. According to the Forbes study, the following are the top five benefits for employees in 2023:

  1. Healthcare (employer-covered)

  2. Life insurance

  3. Pension, retirement

  4. Mental healthcare

  5. Employee discounts

These benefits align with what employers are offering.

The top benefits for remote workers are:

  1. Flexible hours

  2. Curated equipment

  3. Home office stipend

  4. Virtual team-bonding activities

How do I negotiate for more benefits?

Each interview scenario is different, but you can follow these general tips to increase your chances of getting the benefits you want:

  • Have a candid discussion with HR about your needs and expectations.

  • Keep believing you deserve fair and generous benefits in exchange for your equally valuable work.

  • Know your options and expect your employer to know them too.

  • Take a candid look at your value within your market and immediate hiring pool. This will help you estimate your negotiating power.

  • Ask to include promises of higher benefits for future performance gains and achievements.

Which company is best for employee benefits?

According to a 2021 report from Comparably, the top ten companies for employee benefits (based mostly on employee satisfaction) are:

  1. Google

  2. Peloton

  3. Microsoft

  4. Adobe

  5. Boston Consulting Group

  6. Apple

  7. Facebook

  8. Zoom

  9. Uber

  10. RingCentral

Each of these companies offers a balance between solid core benefits (such as health and wellness and financial benefits) and either a wide or narrow range of first-in-class secondary benefits. These secondary benefits enhance an employee’s lifestyle and work–life dynamic.

Is worker’s compensation considered an employee benefit?

Worker’s compensation is an employee benefit companies must legally provide. It secures medical coverage for injuries or illnesses employees might suffer as a result of employment.

The employer pays for these costs, often as a percentage of payroll, but not directly out of an employee’s pay. Employers purchase coverage through either:

  • Workers’ compensation state funds

  • Private insurance companies

Workers’ compensation can help injured or sick workers obtain compensation for:

  • Lost wages

  • Disability leave

  • Medical expenses

  • Ongoing care expenses

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