Wednesday, July 6, 2011

Lesson #59: Determining Employee Benefits for Your Startup

Following my previous lesson on How to Determine Employee Compensation,  I thought this would be a good time to talk about deciding what employee benefits your startup should offer its employees.

Before we jump into the details, it is worth mentioning that many of these programs only can be offered if a certain minimum number of employees are met (e.g., 10 person staff size).  And, in my opinion, they should only be offered if the company can actually afford them (so wait until proof of concept is behind you).  Yes, employee benefits will help you to attract and retain employees, but some of the below carry more expense than others, so budget and phase-in overtime, according to where you are in your growth curve.

Let's start with the "cheaper to implement" benefits.  Offering your employees vacation days and holidays off is pretty much expected in any company.  At the time of hiring, entry level employees typically get 10 days of paid vacation and executives typically get up to 20 days of paid vacation.  In addition, employees can typically earn one additional vacation day per year, for each additional year of service with the company, capped at up to an additional five vacation days.  When designing your vacation plan, structure them in a way that employees can carry-over no more than five unused vacation days to the following year.  Which, in essence, is like saying "use it or lose it", so you are not building up huge unpaid vacation day liabilities at the time an employee terminates their employment with the company.

Another easy to implement benefit is offering employees flexible time, to work whatever days/hours are most convenient for their personal schedules.  This allows the working parent flexibility to drop off and pick up their kids from school, when a rigid 9am start-time can often get in the way.  It also allows them to schedule doctors appointments or home repair services during the day, provided they work late that night or on the weekend to make up for it.  Don't manage your staff based on their "face time" in the office during the normal work day.  Instead, manage them based on the work quality and output, regardless what hours they are working (as long as they are working, one way or another).

Offering "employee pricing" on your products and services is also a nice benefit.  When I was at iExplore, our staff could purchase any of our trips at cost, typically saving them 35% of the retail prices, a savings up to $1,000 per person.  And, we extended these benefits, not only to the employees, but to their friends and families, as well.  So, there can be some real savings and benefits to employees from programs like these.

Another low cost benefit is offering your employees basic life insurance, accidental death and disability insurance.  These benefits are typically offered as an inexpensive add-on to your base health insurance package, which we will discuss below.

Now comes the more expensive benefits.  The first of which is offering your employees healthcare coverage.  At a minimum, that could simply be medical insurance, or it could also include other perks like dental insurance, vision coverage and flexible healthcare spending accounts.  There are also many variations on a theme, to keep your costs at a minimum.  This includes deciding: (i) if you are only offering a low cost HMO option, or also an expensive PPO option; (ii) if the plan will be provided by a big brand insurer like Blue Cross, which can be expensive, or a cheaper provider; (iii) what percentage of plan expenses will the company pay for (with market rate at least 50%); (iv) what basic coverage levels will be provided by the insurer (with 90% in-network expenses and 70% of out-of-network, a typical plan); and (v) what level of annual deductibles are required of the employee (typically in the $500 to $1000 range). 

So, depending what mix of the above decisions you make, will have a material impact on your overall healthcare benefit expenses.  But, cost of the plan is only part of your thinking, as you should also make sure whatever plan you offer is "juicy" enough to have real benefits for your employees (e.g., a plan from a less known insurer where the employee's doctor is not in-network will be meaningless to them).

And, worth mentioning, more and more companies (especially startups) are cutting healthcare benefits altogether.  The plan expenses have been rising so quickly over the last decades, that they have created a terrible burden on the employers' budgets.  And, frankly, employees are not staying with companies for decades at a time, they are hopping from job to job every couple of years.  So, because of this, many people are buying their own individually-sourced and funded healthcare plans on their own, so they don't always have to reapply and risk getting denied for pre-existing conditions down the road. 

And, individual healthcare plans are easier to buy than ever from the big insurers websites, and the costs of these plans can often be comparable (or cheaper) than paying for the same coverage via a company-sponsored group plan (especially for startups).  As, an example, my family coverage at iExplore was a $20,000 annual bill to me, and my individually-sourced plan (also from Blue Cross) was only a $12,000 bill to me, as I was able to customize it to exclude maternity coverage, since we were done having kids.  So, it can offer be cheaper to give an employee an extra $5,000 in salary (for them to cover their own healthcare expenses) than for the company to carry the costs of funding their own healthcare plan for the company.

Another popular benefit is offering your employees a 401k plan, including a modest annual company match (e.g., 3%-5%).  But, again, this can get expensive and should only be implemented if your business can afford it.  If employees are desiring a way to create the tax benefits of 10% payroll withdrawals and taxes deferrals until funds are distributed from the plan down the road, you can always educate them on how to set up an individual IRA plan for themselves, outside of the company.

At the end of the day, each employee is driven by different things.  Ask them what benefits are most important to them, offer them what you can afford and offset any benefits shortfalls with increased salaries, to stay competitive.  The job market is very competitive, and you always want to make sure your employment packages (salary and benefits) are in line with the market, for a company of your size.  Your insurance broker will be able to coach you to the right answers here, based on what they are seeing in the market based on the actions of their large mix of clients.

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