Mutual Benefits Giving employees the benefits they want means a healthier bottom line.

This is the myth: Small businesses cannot afford to offerbenefits, so they don't. Swallow that myth, and your businessmay bolster its bottom line in the short run. But that samepenny-wise philosophy may strangle your business's chance forlong-term prosperity. "There are certain benefits goodemployees feel they must have," says Ray Silverstein, founderof PRO, President's Resource Organization, a Chicago-basedsmall-business advisory network.

"Everyone who interviews for a job today wants to know whatbenefits are offered," adds Henry Moyer, a partner inHirschfeld, Stern, Moyer & Ross, a benefits consulting firm inNew York City. Heading the list of must-have benefits is medicalinsurance, but many job applicants also demand a retirement plan,disability insurance and more. Tell these applicants no benefitsare offered, and, often, top-flight candidates will head for thedoor. "Without benefits," says Robert J. Kaufman, anAtlanta business litigation attorney, "you probably won'tattract good people."

But there's another, shiny side to this coin: Offer theright benefits, and your business may just jump-start itsgrowth--and fast-track companies from Starbucks to Tom's ofMaine know just how much velocity a creative benefits package canadd to a business's growth.

"Give employees the benefits they value, and they will bemore satisfied, miss fewer workdays, be less likely to quit, andhave a higher commitment to meeting the company's goals,"says Joe Lineberry, a senior vice president at Aon Consulting, aWinston-Salem, North Carolina, human resources consulting firm thatrecently surveyed some 1,000 employees nationwide on what benefitsprograms mean to them. "The research shows that when employeesfeel their benefits needs are satisfied, they're moreproductive."

As a case in point, consider London Temporary Services, a35-employee business recently cited by Los Angeles County for itsfamily-friendly benefits--including a medical plan, vacation time,nine annual sick days and the unconventional extra benefit of twohalf-days off per month. Why give employees that time off?"They need it to take care of personal matters. Many use itfor doctors' appointments for themselves or theirchildren," says co-owner Ileene Bernard, who has offered thisbenefit since 1981. "Of course it costs us money to give thistime off. But we believe we get it back in greater productivity andreduced turnover."

Another example is Skokie, Illinois, gasket-maker Fel-Pro, whoseemployees have free use of a 220-acre recreational facility withswimming pools. The company also sponsors a day-care center nextdoor to its manufacturing plant and provides a thorough health-careplan as well. Founded in 1918, Fel-Pro has followed the samegenerous approach to its employees from the start, and thatphilosophy has helped it grow into a highly profitable,2,000-employee company. "The better you treat employees, themore they can concentrate on doing their jobs," says ScottMies, Fel-Pro's director of work-life benefits. "Treatemployees well, and it comes back to you."

At Seattle-based Starbucks, meteoric growth has also been fueledat least in part by a benefits policy that provides medicalcoverage and stock options to employees, including the part-timerswho make up two-thirds of the company's work force. Thesebenefits--plus paid vacations, a retirement plan and a "coffeebenefit" that gives employees a free pound of beansweekly--have helped keep Starbucks' employee turnover at rateswell below the norm, says company vice president of human resourcesservices Bradley Honeycutt. "We've had wonderful successattracting and retaining good employees," he adds. "Manyemployees come for the benefits--and stay for them. We believe ourbenefits have helped us grow."

But you don't have to be a big company to meetemployees' benefits needs. This is amply proven
by Tom's of Maine, a 72-employee company in Kennebunk, Maine,that makes toothpaste and related personal-care products. Tom'semployees not only get health insurance and retirement plans, butnew parents can take up to four paid weeks of leave, and allemployees are encouraged to take up to 5 percent of their paid worktime and invest it in volunteering for a local community group."What we give to our people, we get back from employees whoare refreshed and ready to work," says company president andco-founder Tom Chappell.

These small businesses are not alone. A 1994 survey by the U.S.Bureau of Labor Statistics found that in companies with fewer than100 employees, two-thirds of workers participated in a companyhealth insurance plan, 88 percent had paid vacations, 61 percentparticipated in employer-provided life insurance plans, and 42percent participated in retirement plans.

That sounds about right to Moyer, whose company specializes indeveloping benefits packages for small businesses. "Our officeis handling about 150 group programs right now," says Moyer."Most have the same basic elements--group life, medical,dental, long- and short-term disability, and possibly a 401(k)[retirement] plan. In most industries, it's now necessary tooffer those benefits to attract qualified employees."

Legal Eagles

Although more small businesses now offer benefits, the coldlegal fact is that benefits are not usually required. The onlyfederally mandated benefit is the Family and Medical Leave Act(FMLA), which requires employers to give workers up to 12 weeks offto attend to personal and medical matters ranging from drugtreatment to the birth of a baby. That time off is unpaid, however,and FMLA applies only to businesses with 50 or more employees.

Complications quickly arise as soon as a business beginsoffering benefits. That's because key benefits such as healthinsurance and retirement plans fall under government scrutiny, and"it is very easy to make mistakes in setting up a benefitsplan," says Kathleen Meagher, an attorney specializing inbenefits at Landels Ripley & Diamond LLP in San Francisco.

And don't think nobody will notice: "The IRS candiscover in an audit that what you are doing does not comply [withregulations]. So can the U.S. Department of Labor, which has beenbeefing up its audit activities," warns Meagher. Either way, agoof can be very expensive. "You can lose any tax benefits youhave enjoyed, retroactively, and penalties can also beimposed," she says.

The biggest mistake? "Leaving employees out of theplan," says Meagher. Examples range from exclusions ofpart-timers to failing to extend benefits to clerical and custodialstaff. A rule of thumb is that if one employee gets atax-advantaged benefit--meaning one paid for with pretaxdollars--the same benefit must be extended to everyone. There areloopholes that may allow you to exclude some workers, but don'teven think about trying this without expert advice.

Such complexities mean it's good advice never to go thisroute alone. You can cut costs by doing preliminary researchyourself, but before setting up any benefits plan, consult with alawyer or benefits consultant. An upfront investment of perhaps$1,000--the amount Meagher says she typically charges for aconsultation--could save you far more money down the road byhelping you sidestep expensive potholes.

Employer Mistakes

Providing benefits that meet employee needs and mesh with allthe laws isn't cheap--"benefits probably add 30 to 40percent over base pay for most employees," says PRO'sSilverstein--and that makes it crucial to get the most from thesedollars. But this is exactly where many small businesses fall shortbecause, often, their approach to benefits is riddled with costlyerrors that can get them in trouble financially, with theirinsurers or even with their own employees. The most commonmistakes:

1. Absorbing the entire cost of employee benefits. Fewcompanies nowadays foot the whole benefits bill, a fact underlinedin a recent survey of California companies by human resourcesmanagement consulting firm William M. Mercer. Mercer's researchfound that 70 percent of employers now require employeecontributions toward health insurance, up from 47 percent in 1989,says Charles King of Mercer. Ninety-two percent of companiesrequire employees to contribute toward the cost of insuringdependents, King adds.

The size of employee contributions varies from a few dollars perpay period to several hundred dollars monthly, but one plus of anyco-payment plan is that it eliminates employees who don't needcoverage. Many employees are covered under other policies--aparent's or spouse's, for instance--and if you offerinsurance for free, they'll take it. But even small copayrequirements will persuade many to skip it, saving you money.

2. Covering nonemployees. "This is a bigmistake," Moyer says. Who would do this? Lots of businessowners want to buy group-rate coverage for relatives or friends.The trouble is, "if there is a large claim, the insurer mayinvestigate," says Moyer. And that investigation could resultin disallowance of the claims, even cancellation of the wholepolicy. Whenever you want to cover somebody who might not qualifyfor the plan, tell the insurer or your benefits consultant thetruth. "Often, coverage will be extended if you simply ask forit."

3. Sloppy paperwork. "This is a dumb thing we see sofrequently," says Moyer. "In small businesses,administering benefits is often assigned to an employee who wears12 other hats. This employee really isn't familiar with thetechnicalities and misses a lot of important details." Acommon goof: Not enrolling new employees in plans during the openenrollment period. "Most plans provide a fixed time period foropen enrollment. Bringing an employee in later requires proof ofinsurability. What if [that person] fails the physical?" asksMoyer, who says that expensive litigation is sometimes theresult.

The prevention is simple: Make sure the employee overseeing thistask stays current with the paperwork and knows that doing so is atop priority.

4. Not telling employees what their benefits cost."Most employees don't appreciate their benefits, butthat's because nobody ever tells them what the costs are,"says PRO's Silverstein.

"Annually provide employees with a benefits statement thatspells out what they are getting and at what cost," says DavidNeikrug, president of Chicago-based The Hakol Benefits Group, abenefits consulting firm. A simple rundown of the employee'sindividual benefits and what they cost the business is verypowerful.

5. Giving unwanted benefits. Such as? A work forcecomposed largely of young, single people "needs life insuranceabout as much as a squirrel does," says Neikrug.

"Benefits work only when employees feel benefited,"adds Lineberry at Aon. How to know what benefits employees value?In Aon's recent survey, workers were asked to rank benefits interms of desirability. Heading the list were medical insurance,employer-paid retirement plans, matched retirement savings, medicalplans for retirees, sick leave, and short-term disability. At thebottom of the list were on-site day care for children and referralservices for child and senior care, benefits Lineberry sayscomparatively few employees need. "Medical and financialbenefits appeal to a broader cross-section of workers," hesays.

Of course, needs and desires vary depending on your workers, sofind out what your staff is interested in. If workers' needsvary widely, consider the increasingly popular "cafeteriaplans," which give workers lengthy lists of possible benefitsplus a fixed amount to spend. Says attorney Meagher,"We're seeing more and more of these plans."

Think Creatively

Does all this sound too expensive? Very small businesses canindeed find that conventional benefits are out of reach--but thatdoesn't mean nothing can be done. "Good benefits don'thave to cost you, at least not very much. There are plenty ofthings employees will really appreciate but that will cost you onlya few dollars," says Neikrug. For instance, "Buyemployees memberships for [a discount store] such as Sam's Clubor Costco. They only cost $20 to $25 apiece, but people love them.Any time a business does something for its employees that theycannot easily do for themselves, the employees appreciate thegesture."

Another example of creativity, says Neikrug, is when he noticedone client company had lots of young parents on the payroll andasked if many used day care. Learning that was so, he approached anearby day-care center and negotiated a discounted group rate."This did not cost the employer a dime, but the employeessaved money," he says. "Thinking like this can reallyhelp small business give employees what they value--and do it atlittle or no cost."

Closing Benefits

"Benefits are for employees, but for the business, therecan be lots of benefits in offering benefits," saysSilverstein. "Done right, benefits make recruiting good peopleeasier, build morale and tie employees closer to thecompany."

"Benefits programs can have unexpected payoffs thatstrengthen the health of a business," agrees David Bollier, aresearcher for think tank The Business Enterprise Trust inStanford, California, and author of Aiming Higher (Amacom),a study of 25 successful companies that put an emphasis on doinggood while earning profits. "Benefits really foster a sense of`We're all in this together,' of collaboration betweenworkers and management.

"Take a worker's needs into account, and that workerwill feel incredible loyalty toward you. There are good businessreasons for offering a good benefits program."

Contact Sources

Aon Consulting, 123 N. Wacker Dr., #1000, Chicago, IL60606, (800) 438-6487;

The Business Enterprise Trust, (415) 321-5100;

Fel-Pro, 7450 N. McCormick Blvd., Skokie, IL 60076, (847)674-7700;

The Hakol Benefits Group, 5 N. Wabash Ave., Chicago, IL60602, (800) 425-6548;

Hirschfeld, Stern, Moyer & Ross, 1270 Ave. of theAmericas, New York, NY 10020, (212) 408-0565;

Robert Kaufman, c/o Kaufman, Chaiken, Rickertsen,Krevolin, Miller & Horst, 400 Perimeter Center

Terrace N.E., #720, Atlanta, GA 30346, (770) 390-9200;

Landels Ripley & Diamond LLP, 350 The Embarcadero,San Francisco, CA 94105, (415) 512-8700;

London Temporary Services, 3250 Wilshire Blvd., #1503,Los Angeles, CA 90010, (213) 384-8881;

PRO, President's Resource Organization, 1325 Astor,Chicago, IL 60610, (800) 276-2233;

Starbucks, (206) 447-1575;

Tom's of Maine, P.O. Box 710, Kennebunk, ME 04043,(207) 985-2944;

U.S. Department of Labor, Bureau of Labor Statistics, Rm.4175, 2 Massachusetts Ave. N.E., Washington, DC 20212-0001, (202)606-6240;

William M. Mercer Inc., (415) 393-6257, fax: (415)393-5205.