Added Value

The first in a three-part series, this article discusses the value of benefits to employees and the cost justification for employers. Part 2 addresses common benefit package options. Part 3 introduces the concept of total compensation and explains how to communicate its value to employees.

Ask a remodeler, “Do you value your employees?” and the answer is, more than likely, “Yes.” It's unclear, however, exactly what that means. Is the remodeler saying he cares about his employees, or is he thinking about how much they contribute to the company's profits?

For remodelers battling competitive markets, thinning labor pools, and fast-rising benefit costs, the distinction is subtle but important. Assigning a monetary value to each employee is necessary to assess the health of the business. Workers add to the bottom line; remodelers should know how much each worker produces and what that productivity is worth.

But the employer-employee relationship is inherently more complex than that. Everyone wants a competitive wage, but most also want something else less tangible — to be treated fairly, to spend time with their families, to not worry about health care. Without incentives above and beyond a wage, workers might produce for a while, but they won't hesitate to leave if a better offer comes along.

To attract the best talent and earn loyalty, employers must offer benefits. The trick: Earn employee loyalty without sacrificing profits.

Benefit costs are out of control in the U.S., driven upward almost entirely by rising health insurance premiums. In the first two quarters of 2006, the average employer in the U.S. spent $25.16 per hour on each employee, and 29% of that cost went to benefits. Last year the average employer-paid premium rose by 9.2%, marking the fifth consecutive increase of at least 9%. Since 2000, health insurance premiums have grown 73%, nearly five times the rates of inflation and wage growth over the same period.

The costs can be staggering. But economists, human resources experts, and many employers agree that in the long term, a stable and loyal work-force is well worth the investment. Workers want benefits and are more likely to stay with a company that provides them. While it's not necessarily true that wages are secondary to benefits in employees' minds, a number of surveys have shown that workers are more inclined to work for companies that provide the benefits they want.

Robert Malone, owner of Baywood Design and Remodeling, San Francisco, says his benefit package includes 100% employer-paid health insurance, paid vacation, six paid holidays, life insurance up to $50,000, a gas allowance, and tool repair. Among Baywood Design and Remodeling's 10 full-time employees, several have worked at the company for years, including a production manager who started 25 years ago. Malone says benefits aren't the only thing that matters to his employees, but that the package is part of a company culture that fosters a comfortable, family-like atmosphere.

“It's about treating my employees well, Malone says, “and about them, in turn, being satisfied with their work and treating me, the company, and our clients well.”

Malone says his competitors offer incentives such as bonuses and profit-sharing plans, which can be used to drive the bottom line. After employees became disinterested in retirement plans, Yorktown, Va., remodeler Robert Criner decided to redirect surplus profits into bonuses that reward his employees for better performance. In the coming months, he plans to add a bonus tied to quantifiable growth goals for each employee.

“I'm laying out three measurable improvements I want people to make, and their bonus will be tied to that. We're trying to use bonuses to teach them to be more productive and more beneficial to the company.”

Bonuses, Criner says, should be substantial enough each year for employees to see clearly how much progress they're making. He learned the value of financial rewards after losing a key lead man who complained that Criner hadn't raised his pay enough.

“I had become complacent,” Criner says. “If you're not being proactive about being as productive as possible and sharing that with your employees, you're going to be on the short end.”

Criner and Malone both say that their comprehensive packages are industry standard in their markets.

“This is pretty normal out here,” Malone says. “I want to do it because it's the right thing to do, but I don't think I could be competitive if I didn't.”

Ultimately, that's the function of a good benefit package: Performance-based bonuses, health insurance, time off, and company outings all serve to win employee loyalty and increase the rate of retention. Workers want benefits; if your competition offers them and you don't, you're going to have a hard time retaining talent.

Although wages and benefit payouts vary across markets and industries, human resources experts say companies with good retention rates generally spend between 35% and 45% of their payroll on benefits. If that sounds expensive, weigh the upfront costs of benefits against the far higher cost of finding and training good employees.

“You really want to be looking at the bottom-line benefit, in that every time you hire a new employee it can cost two to three times an employee's salary to get that employee up and running,” Krauer says. “You have to consider the time lost to hiring: finding candidates, interviewing, training to bring the new person up to speed. There's also the loss in productivity when the employee's gone and while the new hire is being trained.”

Paul Fromstein, an economist at the Employee Benefits Research Institute, says two recent studies of small and large companies across a variety of industries found that managers whose companies offer benefits overwhelmingly report a positive return on the benefit investment.

“It has an impact on the bottom line, whether it's through production or recruitment and retention, or worker health status and absenteeism: The bottom line is [managers] think it's worth the cost.”

The indirect costs associated with turnover are especially painful to the smallest remodeling companies. First, multiple-hat-wearing owners will have to take charge of the entire hiring process. And the smaller a field crew is to begin with, the more severe the blow to capacity when an employee leaves. For example, if a crew of three is reduced to two in the middle of a job, that lost carpenter can represent more than a third of the crew's output if he's a lead or an especially productive worker.

Sometimes, too, an employee's value can't be measured.

“I have a guy who has the best attitude in the world,” says Criner, the Virginia remodeler. “I want him around even if we're not making money, because he motivates everyone else.”

As costs continue to rise, paying for benefits, health insurance in particular, is increasingly difficult. Though costs are rising everywhere, remodelers in and around large cities and metropolitan areas had until recently enjoyed a strong market to help offset the growing expense. Many smaller-market contractors face different pressures.

A recent REMODELING survey found that nearly half of the responding companies don't offer health insurance; most work in smaller markets.

Ken Jones is a full-service contractor in Rochester, N.Y., with six full-time employees. He says that while he pays top-of-the-market wages, he can't afford to offer benefits beyond a week's paid vacation and seven paid federal holidays. Jones estimates that even at a group rate, he'd be spending thousands of dollars a month, an additional outlay he says he simply can't afford. The trouble, Jones says, is that while Rochester's economy is flat, there are contractors everywhere, many of whom are uninsured and who undercut insured remodelers on price.

“In a competitive marketplace where there's no regulation of our competition, just being fully insured is enough of a cost that it makes us uncompetitive,” Jones says. “In my heart, I'd love to give these guys everything, but it's just not affordable.”

Raising prices isn't an option because the local economy isn't growing.

“I've been in business for 30 years, I've never been to court, [or] been called by the Better Business Bureau,” Jones says. “It's been proven for 30 years that we do a great job. But when you're in there at $30,000 and your competition's in there at $15,000 or $20,000, at some point people stop caring about how good a job you're going to do.”

Local suppliers and “big box” retailers who have gained market share through installed sales are creating similar pressure, says Thomas Auten, a Southern California remodeler.

“[Consumers] know what everything costs,” Auten says. “If everyone's charging $1,100 or $1,200 to do a job, you can't come in at $1,300 because you have to pay for the health benefits.”

Despite offering nothing more in benefits than a little paid time off, Jones has managed to hold onto a reliable team. On his six-man crew are three lead carpenters who have been with him for 10, 12, and 18 years, respectively. Paying his men high wages, keeping them busy with challenging work, and treating them well, Jones says, has earned their loyalty.

“I've always tried to pay the highest amount that I think I can afford,” Jones says. “I tell the guys, I'm doing the best I can for you [given the company's revenue]; if that's not good enough, produce at a higher level.”

That Jones has maintained such a steady crew is likely a testament to the relationships he has managed to build with his employees, even without benefits.

It's important to remember, says Krauer, the human resources consultant, that benefits are not a cure-all. If the company has more fundamental problems, such as communications or cash flow issues, employees may still be dissatisfied enough to leave.

“The business has to stay competitive; that's the first priority,” Krauer says. “You do what you have to do to remain competitive and to maintain a solid and content workforce that's loyal to you.

“Sometimes you have to spend money to make money. Part of the struggle for small businesses is to attract and retain. It's the most expensive part of your business and it can make you or break you.” —David Zuckerman is a freelance writer based in Brooklyn, N.Y.

Consider this example. A recent REMODELING survey put an average foreman's or lead carpenter's hourly wage at $25.50. At that rate, spending the nationwide average of 29% of a wage on benefits, the lead costs the remodeler $32.90 per hour.

Based on a 2,000-hour year, the total yearly cost of the lead comes to $65,800.

Now measure that against a potential expense of one and a half to three times base salary for replacing the lead if he quits. (The original annual base salary is $51,000.)

1.5 x $51,000 = $76,500

2 x $51,000 = $102,000

3 x $51,000 = $153,000

The annualized net savings is anywhere from $26,400 to $102,000. Even if you're paying for a premium benefits package at 45% of the yearly wage, you only spend $74,000 on the lead annually, which means there's still a net savings, even at the lowest replacement cost.