From the February 1997 issue of Entrepreneur

This is the myth: Small businesses cannot afford to offer benefits, so they don't. Swallow that myth, and your business may bolster its bottom line in the short run. But that same penny-wise philosophy may strangle your business's chance for long-term prosperity. "There are certain benefits good employees feel they must have," says Ray Silverstein, founder of PRO, President's Resource Organization, a Chicago-based small-business advisory network.

"Everyone who interviews for a job today wants to know what benefits are offered," adds Henry Moyer, a partner in Hirschfeld, Stern, Moyer & Ross, a benefits consulting firm in New York City. Heading the list of must-have benefits is medical insurance, but many job applicants also demand a retirement plan, disability insurance and more. Tell these applicants no benefits are offered, and, often, top-flight candidates will head for the door. "Without benefits," says Robert J. Kaufman, an Atlanta business litigation attorney, "you probably won't attract good people."

But there's another, shiny side to this coin: Offer the right benefits, and your business may just jump-start its growth--and fast-track companies from Starbucks to Tom's of Maine know just how much velocity a creative benefits package can add to a business's growth.

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

As a case in point, consider London Temporary Services, a 35-employee business recently cited by Los Angeles County for its family-friendly benefits--including a medical plan, vacation time, nine annual sick days and the unconventional extra benefit of two half-days off per month. Why give employees that time off? "They need it to take care of personal matters. Many use it for doctors' appointments for themselves or their children," says co-owner Ileene Bernard, who has offered this benefit since 1981. "Of course it costs us money to give this time off. But we believe we get it back in greater productivity and reduced turnover."

Another example is Skokie, Illinois, gasket-maker Fel-Pro, whose employees have free use of a 220-acre recreational facility with swimming pools. The company also sponsors a day-care center next door to its manufacturing plant and provides a thorough health-care plan as well. Founded in 1918, Fel-Pro has followed the same generous approach to its employees from the start, and that philosophy has helped it grow into a highly profitable, 2,000-employee company. "The better you treat employees, the more they can concentrate on doing their jobs," says Scott Mies, Fel-Pro's director of work-life benefits. "Treat employees well, and it comes back to you."

At Seattle-based Starbucks, meteoric growth has also been fueled at least in part by a benefits policy that provides medical coverage and stock options to employees, including the part-timers who make up two-thirds of the company's work force. These benefits--plus paid vacations, a retirement plan and a "coffee benefit" that gives employees a free pound of beans weekly--have helped keep Starbucks' employee turnover at rates well below the norm, says company vice president of human resources services Bradley Honeycutt. "We've had wonderful success attracting and retaining good employees," he adds. "Many employees come for the benefits--and stay for them. We believe our benefits have helped us grow."

But you don't have to be a big company to meet employees' 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's employees not only get health insurance and retirement plans, but new parents can take up to four paid weeks of leave, and all employees are encouraged to take up to 5 percent of their paid work time and invest it in volunteering for a local community group. "What we give to our people, we get back from employees who are refreshed and ready to work," says company president and co-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 than 100 employees, two-thirds of workers participated in a company health insurance plan, 88 percent had paid vacations, 61 percent participated in employer-provided life insurance plans, and 42 percent participated in retirement plans.

That sounds about right to Moyer, whose company specializes in developing benefits packages for small businesses. "Our office is 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 to offer those benefits to attract qualified employees."

Legal Eagles

Although more small businesses now offer benefits, the cold legal fact is that benefits are not usually required. The only federally mandated benefit is the Family and Medical Leave Act (FMLA), which requires employers to give workers up to 12 weeks off to attend to personal and medical matters ranging from drug treatment 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 begins offering benefits. That's because key benefits such as health insurance and retirement plans fall under government scrutiny, and "it is very easy to make mistakes in setting up a benefits plan," says Kathleen Meagher, an attorney specializing in benefits at Landels Ripley & Diamond LLP in San Francisco.

And don't think nobody will notice: "The IRS can discover in an audit that what you are doing does not comply [with regulations]. So can the U.S. Department of Labor, which has been beefing up its audit activities," warns Meagher. Either way, a goof can be very expensive. "You can lose any tax benefits you have enjoyed, retroactively, and penalties can also be imposed," she says.

The biggest mistake? "Leaving employees out of the plan," says Meagher. Examples range from exclusions of part-timers to failing to extend benefits to clerical and custodial staff. A rule of thumb is that if one employee gets a tax-advantaged benefit--meaning one paid for with pretax dollars--the same benefit must be extended to everyone. There are loopholes that may allow you to exclude some workers, but don't even think about trying this without expert advice.

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

Employer Mistakes

Providing benefits that meet employee needs and mesh with all the laws isn't cheap--"benefits probably add 30 to 40 percent over base pay for most employees," says PRO's Silverstein--and that makes it crucial to get the most from these dollars. But this is exactly where many small businesses fall short because, often, their approach to benefits is riddled with costly errors that can get them in trouble financially, with their insurers or even with their own employees. The most common mistakes:

1. Absorbing the entire cost of employee benefits. Few companies nowadays foot the whole benefits bill, a fact underlined in a recent survey of California companies by human resources management consulting firm William M. Mercer. Mercer's research found that 70 percent of employers now require employee contributions toward health insurance, up from 47 percent in 1989, says Charles King of Mercer. Ninety-two percent of companies require employees to contribute toward the cost of insuring dependents, King adds.

The size of employee contributions varies from a few dollars per pay period to several hundred dollars monthly, but one plus of any co-payment plan is that it eliminates employees who don't need coverage. Many employees are covered under other policies--a parent's or spouse's, for instance--and if you offer insurance for free, they'll take it. But even small copay requirements will persuade many to skip it, saving you money.

2. Covering nonemployees. "This is a big mistake," Moyer says. Who would do this? Lots of business owners want to buy group-rate coverage for relatives or friends. The trouble is, "if there is a large claim, the insurer may investigate," says Moyer. And that investigation could result in disallowance of the claims, even cancellation of the whole policy. Whenever you want to cover somebody who might not qualify for the plan, tell the insurer or your benefits consultant the truth. "Often, coverage will be extended if you simply ask for it."

3. Sloppy paperwork. "This is a dumb thing we see so frequently," says Moyer. "In small businesses, administering benefits is often assigned to an employee who wears 12 other hats. This employee really isn't familiar with the technicalities and misses a lot of important details." A common goof: Not enrolling new employees in plans during the open enrollment period. "Most plans provide a fixed time period for open enrollment. Bringing an employee in later requires proof of insurability. What if [that person] fails the physical?" asks Moyer, who says that expensive litigation is sometimes the result.

The prevention is simple: Make sure the employee overseeing this task stays current with the paperwork and knows that doing so is a top priority.

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

"Annually provide employees with a benefits statement that spells out what they are getting and at what cost," says David Neikrug, president of Chicago-based The Hakol Benefits Group, a benefits consulting firm. A simple rundown of the employee's individual benefits and what they cost the business is very powerful.

5. Giving unwanted benefits. Such as? A work force composed largely of young, single people "needs life insurance about 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 in terms of desirability. Heading the list were medical insurance, employer-paid retirement plans, matched retirement savings, medical plans for retirees, sick leave, and short-term disability. At the bottom of the list were on-site day care for children and referral services for child and senior care, benefits Lineberry says comparatively few employees need. "Medical and financial benefits appeal to a broader cross-section of workers," he says.

Of course, needs and desires vary depending on your workers, so find out what your staff is interested in. If workers' needs vary widely, consider the increasingly popular "cafeteria plans," which give workers lengthy lists of possible benefits plus 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 can indeed find that conventional benefits are out of reach--but that doesn't mean nothing can be done. "Good benefits don't have to cost you, at least not very much. There are plenty of things employees will really appreciate but that will cost you only a few dollars," says Neikrug. For instance, "Buy employees memberships for [a discount store] such as Sam's Club or Costco. They only cost $20 to $25 apiece, but people love them. Any time a business does something for its employees that they cannot easily do for themselves, the employees appreciate the gesture."

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

Closing Benefits

"Benefits are for employees, but for the business, there can be lots of benefits in offering benefits," says Silverstein. "Done right, benefits make recruiting good people easier, build morale and tie employees closer to the company."

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

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

Contact Sources

Aon Consulting, 123 N. Wacker Dr., #1000, Chicago, IL 60606, (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, IL 60602, (800) 425-6548;

Hirschfeld, Stern, Moyer & Ross, 1270 Ave. of the Americas, 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.