Why Euro groups must centralise
As the New Year rings in the euro, how much evidence is there that European companies are adopting a more centralised approach to benefits management at the same time as they start using the single currency?
The reasons for a more centralised approach are compelling. Employee benefits represent a huge and, in many cases, growing cost, yet traditionally less time and energy has been spent on managing them than on other aspects of the business. Controlling this outlay is a key concern for European organisations.
Research* our firm carried out last year shows that half of organisations see cost control as the core reason for adopting a global strategy for benefits management. As accounting standards increasingly insist on greater transparency in the presentation of pension expenses, external stakeholders have become more aware of costs, and are more likely to put pressure on companies to justify the expenditure.
On an operational level, economic integration of organisations’ activities and investments around the world means that an integrated approach to benefits makes sense. At the moment, however, only 5% of companies feel they are successfully doing this.
But important starting points have been made. Thirty-five percent of European companies have established a global statement of objectives for benefit provision, and 64% have in place global benefits policies of some kind even if these are unwritten.
As well as cost control, another important factor driving this process of globalisation is that European companies are fighting hard to attract and retain the key employees they need to survive in difficult conditions. These talented individuals are taking an ever closer look at the details of the benefits package, and with the war for talent now fought on a Europe-wide, if not global scale, companies should start to recognise the advantages of headquarter management of these benefits.
Obtaining such consistency often means moving responsibility for designing, funding and financing benefit plans from purely local to more HQ involvement either solely or working with locals. Our research shows that almost all these aspects have seen an increase in involvement by headquarters over the past five years with a consequent decline in purely local influence. And headquarters’ involvement in benefit management looks set to continue to increase. At the moment, only just over a quarter of European companies still use a completely decentralised/local control approach to benefits provision and we would expect this proportion to decrease in the next few years.
But while European organisations rightly wish to control benefits costs and see centralisation as an important driver, they are failing to use the most appropriate tools to accomplish this. For example, multinational pooling – the spreading of insurance risks across international boundaries – is used by only 8% of companies operating in Europe. Despite the appreciation of benefits consistency among organisations, a consistent approach to benefits design is found in only 6%.
Consolidation of investment managers and administration service providers occurs in 6% and 8% of European companies respectively. Global or preferred provider relationships have been established by only 18%, meaning that most European companies are not benefiting from cost savings and quality assurance. Furthermore, the volatile investment markets we have seen in the last year underline how important it is to take a centralised approach to investment strategy to smooth out local instability.
But some aspects of benefits are subject to a greater degree of headquarters’ control. One such is the benefits element of a merger or acquisition, not surprising given the financial impact that benefit issues can have on the transaction. Only in 13% of organisations does the worldwide benefits manager play no role in mergers and acquisitions. Less reassuring is that the majority of European companies still exclude benefit issues from the due diligence and negotiation phases of a merger or acquisition, failing perhaps to understand their financial significance and only addressing benefit issues after the deal is complete (and much of the damage may have been done).
If mergers and acquisitions are one area attracting centralised rather than local benefits management, communications and the use of technology are at the opposite end of the spectrum with only 2% of organisations feeling that they are fully effective in consistently communicating benefits messages across countries. Using technology to communicate both the details and the value of benefits packages is not as common in Europe as it is in the US, perhaps because flexible benefit provision (flex) is more common on the other side of the Atlantic. Presenting employees with a menu of benefits from which to choose particularly lends itself to the use of interactive technology. As the trend towards flex continues, Europe will gradually adopt some of the communication techniques used by companies in the US. Flex aside, the move towards defined contribution (DC) pensions will bring about a need for employers to provide more information to employees, who will have to involve themselves more in planning for their retirement.
When today’s infant euro reaches its fifth birthday, the benefits priority for European companies will remain controlling costs. Risk management will become more important, rising from number three in the list of current priorities to number two in the list of future priorities. The concept of total reward will become much more important for companies, who will see integrated benefit packages a key tool for attracting and retaining talent across Europe.
Instant success in moving towards a global approach to employee benefits is rare. The task can be a daunting one but one which will reap many rewards in cost control and good human resources practice. The best approach for an individual organisation depends on its circumstances, but certainly means getting vital buy-in from local management, indeed our research shows that many companies have or are in the process of creating new roles or functions to start to address these issues. It is also worth remembering that the “people” aspects of a more globalised benefit strategy matter just as much as the figures.
Nigel Bateman is a Partner and Michael Green is senior consultant at Towers Perrin in London
*Worldwide Benefits Management Survey, October 2001. Available from Katy Lepore on (020 8895 3272). One hundred and fifty-seven global companies were surveyed, ranging in size from 5,000 employees to over 300,000.