When developing strategies to manage sickness absence, employers and advisers should beware of acting solely on the basis of their own cost data, says Dudley Lusted
In the past, spending on employee health benefits has been made with little regard for any return on investment (ROI). Indeed, few benchmarks were put in place to measure improvements following any form of investment. However, over the last few years, life has become a lot tougher for those charged with managing attendance or for providing cost effective benefit packages.
The simple truth that employees are not all created equally is commonly known, yet most companies' absence costs are calculated using crude averages that assume everyone is the same. To progress, employers need a better way to determine the relevance of investments in order to understand the ROI for each strategy that they introduce to manage health at work.
Realistic methods
Most organisations calculate the cost of absence as follows: (1) the total salary bill, divided by (2) the number of employees, then multiplied by (3) the number of days lost in a year. Finance directors will, rightly, look at any proposed investment to examine ways of reducing actual costs by a certain amount. In general, the number is so high that it is often hard to believe.
The fact is that the simple calculation described above is not a true reflection of the cost because short-term absence, most of which is caused by minor illnesses such as colds, accounts for the vast majority of incidences of absence. To arrive at a more realistic method, it is essential to segment the workforce into categories. The following is a more realistic method of calculating short-term absence, although more or fewer categories might be preferable (see also figure 1).
- High fee or revenue earners (for instance, lawyers, traders, salespeople) - for this group use a multiple of, up to five times salary, depending on your view of the lost opportunity cost.
- Employees whose absence leads to dissatisfied customers (for instance, if railway signalmen are absent, the trains don't run) - for this group use a multiple of, for example, two times salary as they will need to be urgently replaced and the replacement staff will need to be paid. You should increase the multiple if agency temps are used to replace absent employees.
- Customer service staff or manufacturing staff (that is, employees who directly impact on transacting business and whose absence is likely to be covered by colleagues working overtime) - for these employees use a multiple of one and a half times salary.
- Directors, managers, or anyone who, when absent for a day or two, still has to deal with the work that they would have otherwise done (these employees will almost certainly put in unpaid overtime and even work weekends in order to catch up) - for this group use a multiple of nil. Yes, nil. It is this group, whose short-term absence costs the business nothing, that destroys the crude average investment argument because, in reality, their short-term absence does indeed cost nothing.
Of course, the method described above is harder to apply than the traditional method, but unless an effort is made, companies and advisers will remain unaware of the true cost of absence. You can also use the same concept to identify where levels of absence are greatest. The nearer a category of employees is to a salary multiple of one, their propensity for short-term absence is greater.
On the other hand, those in category one (highly paid, highly motivated high fee earners) are also more likely to suffer from presenteeism - a case of being at work when unwell.
Category four comprises the bosses, who are in control and are therefore generally positive about their role and relationship to their organisation. Those in this category are also more likely to suffer from presenteeism.
Those in category three are the foot soldiers - people who are not in control and are generally told what to do. Employees in this category tend to respond better to empowerment than they do to rules, which is why employers that are successful at managing short-term absence are those that create a positive workplace culture where employees are motivated, challenged and appreciated and want to come to work.
The proposition set out above only applies to short-term absence. If those of us whose short-term absence costs nothing still cost the business nothing after, say, three weeks, then our actual value to the business should be questioned. Similarly, within three weeks, the higher costs associated with categories one to three above will have been moderated and longer-term solutions put in place. These might also have high costs attached but, for relative simplicity, we need to draw a line somewhere. After three weeks the cost of absence could reasonably be calculated as a direct multiple of salary.
Generally speaking, low cost initiatives such as employee assistance programmes (£10 to £20 per employee) or a health promotion programme (£2 to £5 per employee) will generally pass the ROI test because the investment is low, rather than because the actual cost of absence is high. The more expensive the benefit, therefore, the more it needs to be geared to the value of the employee.
Having eliminated short-term absence costs, we can consider long-term absence as a separate investment decision. Does an investment to reduce longer-term absence stack up by comparing the reduction in absence with the cost of the service?
In our experience, medical insurance and healthcare trusts do produce a positive ROI for higher paid individuals. This is because the cost of providing healthcare benefits is less than the cost of the lost working time saved by fast tracking treatment.
Comprehensive
However, the comprehensive schemes that employers have traditionally provided as a perk to senior managers may not provide a positive return for lower paid employees as their absence cost savings are not met by the cost of the cover.
According to research from AXA PPP Healthcare, medical insurance saves office-based staff approximately one day of absence per employee. For manufacturing staff, the figure is about a day and a half. It may be that the scope and therefore the cost of medical insurance needs to be reduced in order to see a positive ROI for lower paid employees.
For example, AXA PPP healthcare's Back to Health product, only pays for treatment of medical conditions that stop employees doing their jobs. This lower specification typically reduces the cost to approximately £150 per employee per year compared with the typical bosses' cover, which costs around £400. This reduction produces a positive ROI for lower paid employees showing a typical return of £2 of absence saving for every £1 invested. This ROI works because of the balance between the cost of absence for lower paid employees and the lower cost of provision of the service.
Try this method of calculating the cost of providing health related benefits to your clients' business and, if it doesn't always produce the required ROI, remember that most healthcare management products and services also provide an important employee benefit, sending as they do, a strong positive message to employees that their company delivers the goods when it comes to caring about their health and well being.
COVER NOTES
- The fact is that the simple calculation often used is not a true reflection of the cost because short-term absence, most of which is caused by minor illnesses such as colds, accounts for the vast majority of incidences of absence.
- A more realistic and effective method of calculating absence is to segment the workforce into categories.
