Perks That Work

Want to find and keep the best people? Make sure your benefits are up to date

It's never been this crazy before. Recruiting and retaining the best people has always been hard for small companies, which often have to stand in line behind bigger, better-heeled employers. But with national employment at an all-time high, the perks some companies are lavishing on employees sound less like innovation and more like desperation. Need a new car? We'll lease you a late-model luxury sedan, and you don't have to be a manager to get one. Strapped for your kid's college tuition? We'll foot some of the bill. Caught in a time crunch? We'll do your laundry or even pay for a maid. Flex time, telecommuting, full-body massages--whatever it takes to make you feel right at home. You can even bring your dog or cat to work, and we'll toss in pet health insurance.

No, we're not kidding--you can't make this stuff up (see photos, page F.34). Entrepreneurs are going all-out to recruit the people they need. There's Revenue Systems Inc. in Alpharetta, Ga., which leases a custom-built, fully insured BMW with unlimited mileage for every employee. In Montreal, Zero-Knowledge Systems, an Internet privacy company, has resorted to private screenings of new movies and doing laundry for its 65 employees: drop it off on Tuesday, pick it up on Wednesday folded, pressed, and crowned with a colorful lollipop. And some companies are getting ruthless about retention. "We recruited a guy from a small information-technology company for a client," says Joseph E. Onstott, managing director of the Onstott Group, a small Wellesley (Mass.) executive search firm. "His employer offered him a $200,000 check to stay. He refused. So they called his wife and told her about it, and when he got home, she said, `Are you nuts?' He stayed put."

Get used to it: There's no relief in sight. The jobless rate has been stuck below 5% for more than two years and shows little sign of budging. So if you haven't beefed up your benefits and compensation package lately, your best people are tempting targets for your rivals, and you'll have a hard time luring qualified replacements.

The trick, of course, is to beef up benefits without going broke. That's not easy when the cost of a basic benefit like group health insurance is rising at 6% to 12% annually, says Buck Consultants. Pleading poverty is no longer an option, says Wendy C. Handler, assistant professor of management at Babson College. "You can't get out of providing health insurance or a retirement plan by arguing that you can't afford the gold standard," she says. But you may be able to afford a stainless-steel standard--a package of benefits big enough to keep your company competitive but small enough to fit a limited budget. With a little tinkering, you can assemble a plan that includes modest medical insurance, a payroll deduction plan that lets employees pay pretax dollars for medical and dependent-care expenses, a basic retirement plan, and a few other goodies.

It's not as hard as it sounds. For starters, you're not really competing head-to-head with huge corporations for every employee. True, an IBM or a Microsoft is able to offer an array of benefits that you can only dream about. But a small company can offer greater flexibility and opportunity for growth, which shouldn't be underestimated, especially since some people recoil at the idea of working for a corporate giant. In fact, says benefits consultant William G. Bliss, president of Bliss & Associates Inc. in Wayne, N.J., small companies are now better positioned to attract the best and brightest than the larger companies.

With that in mind, an effective package must include features designed to attract and reward the employees you want. For instance, the first benefit established by Morris Financial Concepts, a Charleston (S.C.) financial planning firm, was paying for its four employees' ongoing educational expenses. "I wanted to hire professionals who want to continue to learn," says owner Kyra Morris. And at Brella Productions Inc., an Evanston (Ill.) video production company, nine workers set their own hours from the day they were hired. "Controlling their schedules is very attractive to the kind of employees we target--people in their 20s and early 30s," says President Bernadette Burke. "And whenever possible, we give the option to work from home."

Obviously, your needs depend on the industry you're in (tech employees will expect stock options) and the average age of your staff (younger workers won't care as much about a retirement plan). And soft perks aren't enough. You'll need a core package of basic benefits.

Take a look at the table appearing on page F.25. It illustrates three packages of core benefits in different price ranges. Sure, you might be too strapped to provide the best health insurance in town, but perhaps you can make up for shortcomings with noncash benefits like flextime or stock options. And you can enhance or upgrade individual components as your company grows. But without these basics, your chances of holding on to anybody in this economy are pretty slim.


Nothing is more basic than medical benefits. "Many, many people work simply for health-care coverage," says Joan Vines, principal at Grant Thornton LLP in Washington, D.C. Small group health insurance isn't cheap. Many companies reduce health-care costs by passing along part of the bill in the form of bigger deductibles and co-payments, or by paying only for employees' coverage. "It's becoming almost standard for the employee to pay for dependent care," says Vines.

A smart, inexpensive way to soften the blow to workers' wallets is to arrange for them to pay their premiums in pretax dollars through a payroll-deduction plan known as a section 125. Benefits consultants say these plans are underused because most small employers have never heard of them. A basic section-125 plan for premium payments costs between $250 and $500 a year, says Bradley C. Fields, co-owner of Northwest Benefits Group, Inc. in Portland, Ore.

You can cut health-insurance costs and reward key staff at the same time by offering two medical plans: a low-cost version that appeals to the rank-and-file, and a higher-priced model for executives. For example, you could pay 100% of the premiums for a health maintenance organization plan that covers people only when they use network doctors, and pay only 65% of the premium for a point-of-service plan that provides coverage outside the network, too, says Eugene J. Koster, health insurance division manager at American Economic Group in Watchung, N.J. Or you could lease workers from a professional employer organization (PEO), which can provide them with richer benefits than small companies can afford, says Steve Rosenthal, president of EPIX, a PEO whose average client company employs 20 people.


For an extra $5 to $10 a year per employee, the plan can include flexible spending accounts, in which employees set aside part of their salaries to pay for dependent care and unreimbursed medical expenses. They pay no income taxes on money diverted into a flexible spending account--and neither do you: "You save about 7.5% to 8% in Social Security and federal unemployment taxes on money employees put into these accounts," says Fields.

What can they use the money for? A surprisingly broad array of services, including day-care centers, in-home nursing--even summer camp. Eligible medical expenses include health insurance deductibles, co-payments, and co-insurance, plus expenses not covered by most plans such as prescription glasses, contact lenses, air conditioners, and filters for allergy relief, a reclining chair prescribed by a doctor, acupuncture, psychiatric care, and whirlpool baths, to name just a few.


These are ranked second in importance only to medical coverage but are currently offered by just 20% of all small companies, says Spectrem Group, a San Francisco benefits-consulting firm that just completed a landmark study of 2,600 small employers. But don't get complacent: The figure tops 50% for small companies of more than 20 people, and thousands more plan to start offering one within two years.

Why the lag? Perhaps it's because more than a third of small-business owners polled this year by the nonprofit Employee Benefit Research Institute were unfamiliar with the least expensive retirement plan they can offer--the simple IRA, which was created specifically for small businesses. Simple IRAs require no reporting, can be administered internally, and cost about $10 per person to set up. The only expense is your mandatory contribution: 3% of payroll.

But no retirement plan is as attractive to employees as the 401(k). A 25-person plan costs about $2,000 to $2,500 to set up and about $1,500 to $2,000 a year to run, says Fields--not counting any matching contribution. Still, even generous employers don't always provide a 401(k) match. One company that doesn't is Northshore International Insurance Services Inc., an 85-person Salem (Mass.) company whose benefits are competitive with those of much bigger companies. "We have a 401(k) plan, but we don't do a match because it tends to be disadvantageous to lower-paid people," says David Ives, company president. "They can't take full advantage of it. Instead, we put money into a profit-sharing plan, so everyone benefits on an equal basis."

A profit-sharing plan is also a good alternative to handing out equity in your company, which is increasingly demanded by highly skilled employees. Generous profit-sharing and handsome bonuses let employees participate directly in the growth of the business, says Larry Elkin, head of a financial planning firm in Hastings-on-Hudson, N.Y. "When people ask for equity, what they often mean is that they want more money," he adds, "not the management responsibility that goes with control."


So what can you skimp on? Group life insurance, disability coverage, dental insurance, long-term-care coverage. Everyone agrees that dental insurance is overpriced. "You don't get much more than your premium back," says Steven Kaye, president of American Economic Group. As for life insurance, "the type of people I was looking to hire already had their own," says Kyra Morris. And if you have enough money for only one health-related program, disability insurance isn't an economically efficient benefit, Elkin points out. "When I buy health insurance for employees, it's tax-deductible to me and tax-free to them. But if I buy their disability coverage, their benefits are taxable."

Suppose the worst happens and your most valuable employee announces she's going to leave. Should you try to keep her with a massive counter-offer and lavish new benefits? Probably not, says Bliss. "Something psychological happens--the owners now think they own the person." The resulting friction usually leads to a resignation a few months later. "At the most, you're buying yourself a little time," he says. A better strategy is to have the fringes in place ahead of time so they're not a sore point, he says--and then don't rely on them too much for retention. The decision to stay is more often based on how much recognition and respect the boss gives to a prized staffer than on how much the co-payment is on the dental plan. Pay more attention to your management style, and everyone will benefit.

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