Opinion: The flaw of averages

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We all know the simple truth that, when it comes to the value of their presence, employees are not all created equally. Yet most companies' calculate their absence costs using crude averages that assume we are all the same.

Employers should beware, however, of relying solely on their own or industry average cost data when developing strategies to manage sickness absence as these can mask important differences in the impact of different categories of employees. Misunderstanding the true cost of absence can lead to flawed investment in the various management tools available to tackle the problem.

In the past much spending on employee health benefits has been made with little regard for any return on investment (ROI). But lately those charged with managing attendance have found that life has become tougher and that they need better ways to determine the cost effectiveness of their investment strategies to manage health at work.

Most employers calculate the cost of absence as (1) the total daily salary bill divided by (2) the number of employees and then (3) multiplied by the number of days lost in a year. Finance directors will, rightly, look at any proposed expenditure and ask ‘How do we cut our costs by at least this amount?’ The number can be alarmingly high.

But this simple calculation isn’t a true reflection of the cost because short term absence (most of which is caused by colds and the like) accounts for most incidences of absence. For a more realistic appraisal you have to segment the workforce, say, into the following four categories.

  • 1. High fee or revenue earners (for instance, lawyers, traders, salespeople etc.) – for this group use a multiple of up to, say, five times salary depending on your view of the lost opportunity cost.
  • 2. Employees whose absence leads to dissatisfied customers (for instance, railway signalmen (trains don’t run), delivery drivers etc.) for this group use a multiple of, say, two times salary as they need to be replaced urgently and the replacement needs to be paid (up multiple if you use agency temps).
  • 3. Customer service staff and manufacturing staff (that is, employees who directly affect business transaction and whose absence is likely to be covered by workmates doing overtime) – for these use a multiple of, say, one and a half times salary.
  • 4. Directors, managers, me, probably you or anyone who, when absent for a day or two, still has to do the work they would have done (invariably they put in unpaid overtime, work weekends etc. 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) who destroy the crude average investment argument because their short term absences do, indeed, cost nothing.

Whilst this approach may be harder to apply it does let you know the true cost of absence. In practice, the nearer a category of employees is to a multiple of one the greater their propensity for short-term absence.

On the other hand, the highly paid, highly motivated, of category one are more likely to suffer from presenteeism (which I define as ‘at work when unwell, often caused by a mistaken belief in their own indispensability’) than from short term absence. Likewise employees in category four – the people in charge.

Those in category three – the foot soldiers are generally told what to do and tend to respond better to being managed well than to rules. That’s why employers that create a positive workplace culture where employees are motivated, challenged and appreciated are successful at managing short term absence.

If those of us in category four still cost our employer nothing after, say, three weeks, then our actual value should be seriously questioned! Similarly, within three weeks the higher costs associated with categories one to three above will have moderated and action taken to address them. These too might have high costs but for simplicity after, say, three weeks the cost of absence can arguably be calculated as a direct multiple of salary.

Generally speaking low cost initiatives such as employee assistance programmes (£10 to £20 per employee) or health promotion programmes (£2 to £5 per employee) 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, the more it needs to be geared to the employee’s value.

Management of longer term absence requires a separate investment decision. In our experience healthcare schemes (which manage problems that otherwise become long term absences) produce a positive ROI for more highly paid employees because their cost is less than the cost of the lost working time saved by fast tracking treatment.

However, the comprehensive schemes employers have traditionally provided for senior managers may not generate a positive return for lower paid employees as their cost doesn’t cover the absence cost savings.

We know that healthcare cover saves office based staff approximately one day of absence per employee; for manufacturing staff it’s about a day and a half. So, to see a positive ROI for lower paid employees, the scope and therefore the cost of cover needs to be reduced.

For example, we at AXAPPP healthcare have developed an early intervention product called Back to Health that only pays for treatment of medical conditions that stop employees from doing their jobs. It only costs around £150 per employee per year (compared with £400 for typical bosses’ cover) and generates a positive ROI for lower paid employees, with a typical return of £2 of absence saving for every £1 invested. The ROI works because of the balance between the cost of absence for lower paid employees and the service’s lower cost.

Try this method of calculating the cost of providing health related benefits to your organisation and, if it doesn’t always produce the required ROI, remember that most healthcare management products and services also deliver another important employee benefit – a strong positive message that, when it comes to caring about their health and well being, their employer is on the case.

Dudley Lusted is head of corporate healthcare development at AXAPPP healthcare.

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