Total flexible compensation key in the new world of business

TFC gives companies the tool it takes to get — and keep — the best employees.
By Daphne Woolf
|Canadian HR Reporter|Last Updated: 06/27/2001

For employers, attracting and retaining the best employees is a serious concern that needs a solution. Long gone are the days when HR departments had their pick of the litter. In fact, a recent survey of CEOs conducted by Angus Reid for William M. Mercer Ltd. revealed that, next to increasing profits, Canadian CEOs are most concerned with getting and having the right people, skills and talent to fuel higher corporate profitability.

Although today’s senior executives know they have to provide in order to obtain, there is still the unavoidable question of how. An answer to consider is total flexible compensation (TFC).

What is TFC?

Look at TFC like it’s a salad. Some people like tomato and cucumber. Some people prefer sun-dried tomatoes, parmesan and feta cheese. Others enjoy olives and anchovies.

Common to each salad is the base, lettuce. Employees decide which part of the total compensation plan makes up the “lettuce.” Each employee puts “lettuce” — or the mandatory part of the compensation program in their own salad bowl. Then the employees individually select what they would like to add.

Some employers will offer “olives” and some may not. In other words, employers decide what part of the total compensation plan is available for individual choice and what is not.

The end result is that each employee has a complete salad that meets his or her nutritional needs — or a complete total compensation program that meets their fiscal and personal needs.

Simply put, TFC integrates components of an employee’s overall compensation package including cash, benefits, pension, stocks, perquisites and so on, and gives each individual some control over how it’s allocated.

Control is a demand that employees have strongly voiced in recent years. Until now, there has never been a tool to help employers and employees achieve this request. Although flexible-benefit plans have aided companies in offering some control, TFC brings the next generation of flexibility to the business world.

TFC typically offers the employee the opportunity to choose from a combination of cash and various benefits — a selection that most appropriately meets their individual needs.

Normally, the company will put a certain portion of cash compensation on the table, as well as other items such as health-care benefits, vacation time, car allowances and pensions.

Under TFC, employees mix and match the items on the table with the option to, perhaps, trade-in the value of one component of the total compensation package for another.

A lot of employers have heard of “total compensation.” Normally, this structure values the cash and non-cash components of what makes up an employee’s package, basically to ensure that compensation is competitive. TFC is the next evolution in compensation, offering organizations a competitive edge in recruitment and retention.

For example, in a traditional flexible arrangement, each component of the total compensation package sits in its own “bowl,” that is, a stock savings plan is developed separately from the retirement plan, health-care benefits are separate from vacation.

Although most firms have offered some sort of flexibility in one or more of the bowls, each part of the package is usually isolated from the others.

TFC is different because ingredients from different bowls are tossed together. Employees have the opportunity to move the value of the total compensation package around.

Most companies will set appropriate limits to the flexibility. For example, employees may be required to take a certain amount of base pay as cash and enrol in a basic medical plan.

The company then sets the remainder of the compensation value into a flexible element for employees to allocate based on their own needs, values and what is important to them.

In this arrangement, part of the total compensation package is mixed together: cash, benefits, retirement plan, vacation, stocks, training and perks.

How does it work?

TFC is adaptable to fit specific company objectives. For example, a paternal organization may give employees choice, but within narrow limits.

To carry the salad analogy further, the amount of choice may be restricted to salt, pepper and parmesan cheese.

This means that a greater part of the total compensation plan is not flexible, so the flexible component is smaller, reducing choices.

There is only so much that can fit in a salad bowl! Some individuals may want more tomatoes, where as others may want their cucumbers sliced smaller to allow for more lettuce.

By integrating the total compensation components at the initial design stage, employees can customize their packages to a greater degree than if each component remained separate. Also, the stakes are higher in TFC as there may be more money on the table.

For example, in a traditional flexible-benefit plan, cash plays a passive role in topping up choices through potentially small payroll deductions. TFC is integrated so cash plays a much bigger role.

TFC plan design

There are two fundamental steps in designing a TFC plan. Employers must decide what’s in and what’s out. Basically, the amount of lettuce or mandatory coverage must be set and the flexible and non-flexible elements must be determined.

Part of the answer is technical — determining how much flexibility employees can handle — and part of the answer is philosophical, reflecting corporate culture.

After deciding the type and amount of the flexible components, or salad ingredients, the next step is determining relative values for each element.

Relative value calculations convert each part of a TFC plan into a present-value cash equivalent, done either on a dollar basis or as a per cent of pay. Cash equivalency ensures that your TFC plan design meets your compensation cost parameters.

Once the components of what’s in and what’s out are determined, the plans can be designed and put in place.

Each company designs its own template to fit specifically with its organization. The beauty of TFC is that it is not all or nothing; there are no fixed ways to approach TFC and there is no set template.

Which companies should consider TFC?

The next logical question for employers becomes, “when should a company consider a TFC plan for its employees?” For most companies, the answer is “when the current compensation plan no longer meets the strategic HR objectives.”

For example, a company with a previous tradition of offering long-term incentives is now focusing its business strategy to reflect the changing business environment.

The organization is looking to attract highly skilled employees, a strategy that may result in a higher turnover rate. In pursuing these talented workers, the ideal candidate may not fit a specific compensation or benefits mould.

Customization is crucial to ensure a package has value and relevance. In some scenarios, employees will have other priorities, that is, they may want more vacation time or education programs instead of a health-services spending account.

TFC is a tool to give both the employee and employer control and flexibility over their total compensation plan.

In addition to offering relevant and flexible packages, companies can use TFC as a “branding” tool. Most organizations spend a lot of resources on branding to draw and keep customers. TFC can be a brand for “internal” customers — the employees. How you present and accommodate employee compensation will help set your organization apart as distinct to the worker being targeted.

The desire to have an internal brand to attract and retain employees stems from a changing work environment. Evident by the concerns of CEOs across Canada, the new workforce requires hot talent to meet growth and profitability objectives. TFC offers the tool to help create the branding and garner the employees that are needed.

In order to establish an effective brand, the TFC-plan design must reflect the corporate image and parallel an organization’s goals. In order to do this, a number of things must be considered:

•What problems is TFC intended to address?

•How to start — with a little TFC, or possibly a pilot group? The plan rollout can impact how TFC works over time.

•Does TFC fit your culture? If a company is wholly paternalistic towards the workforce, TFC may not be right.

•Are there employment standard issues? Due diligence is important.

•The investment cost to design, introduce, and operate TFC must be established against a budget.

•Are there resources? What training is required?

•What can the administration system currently handle, and what must be changed? Outsourcing TFC may be an option.

•Tax effectiveness should not be a tax driver in the plan. The tax implications must be understood by both employer and employee.

Finally, TFC is not for every company. It is not the hot new management buzzword that every business should weave into its vocabulary.

But if attracting and retaining the right people with the right skills and the right talent is important, then TFC is a tool that should be looked at as corporations plan for the new world of work.

Daphne Woolf is a benefits consultant in the Toronto office of William M. Mercer Limited. In addition to 11 offices across Canada, Mercer has more than 100 offices in 24 countries around the world.

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