The Business Impact Of Financial Insecurity
Each year, JUST Capital asks Americans what they believe companies should prioritize today, and we consistently hear from the public that companies should start with their workers – providing them with fair pay, good benefits, tuition reimbursement, paid family leave, and childcare. It’s unsurprising when you consider that many workers in America are financially insecure, struggling to pay off their bills by the end of the month, save for retirement, or cover an unexpected expense.
The impact of workers’ financial insecurity on families and communities is well documented. What’s less discussed is the impact on businesses and why companies, along with their investors, should take steps to alleviate this problem.
Financial Precarity in America and Its Impact on Business
Results from a recent survey administered by the Federal Reserve highlight the financial precarity of many U.S. households. When asked to characterize their financial situation, one in four adults said they were either “just getting by” or “finding it difficult to get by.” Beyond sentiment, the survey shows in stark numbers that many people are one missed paycheck or flat tire away from financial distress. Four in ten adults would struggle to come up with just $400 in the face of a financial emergency. Similarly, other research has found that 60% couldn’t afford a $1,000 emergency expense.
An expanding field of research illustrates why a financially distressed worker isn’t good for businesses. In a first project of its kind, professors Carrie Leana and Jirs Meuris of the University of Pittsburgh provide empirical evidence for the real costs to employers of employee financial insecurity. Leana and Meuris studied a large transportation company employing over 1,500 full-time, short-haul truck drivers. Two-thirds of employees did not have enough savings to cover 60 days of expenses in case of injury or illness, and 33% reported having financial stress.
This stress – or “cognitive tax” – was associated with drivers being 50% more likely to have a preventable accident in the following eight months, even after controlling for other factors like tenure, conscientiousness, and job satisfaction. The researchers estimate that employee financial precarity costs the company at least $1.3 million per year, given the average cost of a commercial truck accident.
Similarly, according to MetLife, employers have lost $250 billion each year due to employee stress affecting their work, with personal finances ranking as the top source of employee stress. One out of every three employees admits to being less productive at work because of their financial stress. It is estimated that, for a company of 10,000 workers, that adds up to a loss of 1,922 hours and $28,830 in productivity each week, not even accounting for the cost of turnover, which according to one meta-analysis is typically 21% of an employee’s annual salary. It is clear that employers and investors can no longer afford to sit on the sidelines.
Strengthening and Expanding Benefits
Despite the research linking business outcomes with the financial precarity of workers, businesses and investors are now just beginning to pay attention to this problem. As the old adage goes, the first step to fixing a problem is knowing there’s a problem. Businesses and investors need to begin by asking their workers and assessing on their own if their current wages and benefits are covering life’s expenses, or if employees are relying on public assistance programs, drawing down their savings, or taking out credit to cover the bills. These questions can be connected to non-financial performance criteria that are monitored over time and give business more insight into their workforce. Acting on this issue can help companies, especially in a tight labor market, on issues like turnover, productivity, and employee engagement.
The good news is that it’s easy for employers to take some basic steps to support employee financial security and provide a high-quality emergency savings benefit to employees. Commonwealth, a Boston-based mission driven organization that builds solutions to make people financially secure, has conducted extensive research on emergency savings and developed solutions to make them more widely accessible. According to Commonwealth research, infrastructure is in place (e.g., payroll systems) to facilitate splitting paychecks into multiple accounts, including one for emergencies. Employee onboarding can be improved to secure linkages to these paycheck splitting moments. Financial technology (“fintech”) and financial services firms are beginning to innovate on and improve the quality of emergency savings products on the market for employees. In a Commonwealth survey released this week of over 1,000 workers, 61% were interested in being able to split their pay into checking and savings accounts via direct deposit. Another study of over 2,000 employees showed that three in four would be attracted to an employer-based emergency savings program, and nearly all said they would participate in one if their employer matched their contributions.
Emergency savings isn’t a panacea for financial insecurity, but it is a necessary step to achieving financial stability. It provides a cushion to mitigate the impact of unexpected expenses. Similarly, workers need access to savings vehicles and benefits to help cover expected expenses so they aren’t drawing down emergency savings to meet everyday financial needs. Consider, for example, the financial burden of not having access to paid family leave. Among workers who took unpaid or partial leave, 60% found it difficult to make ends meet, with one in three spending down their savings.
National surveys and JUST Capital’s research indicate that many workers still lack access to robust benefit packages. In 2018, only 6% of companies ranked by JUST have employees that rate their worker benefits policies at least a 4 on a five-point scale when evaluating the quality of benefits. Companies should take steps to strengthen their benefits and ensure that all workers, regardless of hours worked or salary, have access to them.
The advantages of strengthening benefit packages and establishing emergency savings tools for companies are striking. JUST Capital has conducted a series of analyses exploring the connection between just business behavior and financial return – including Return-on-Equity (ROE). In one report, JUST found that companies that disclose their worker policies on issues like paid family leave, tuition reimbursement, and childcare policies – allowing prospective employees, investors, and the public to evaluate their practices – have a ROE that is on average 1.2 to 3.0 percentage points higher than companies that don’t disclose their policies. Individual companies have also touted returns on specific programs too. Patagonia and JPMorgan Chase, for example, estimated a 91% and 115% return on their investments in childcare programs; these gains were fueled, in part, by reduced turnover and greater employee engagement. Companies are likely to observe similar returns if they expand their benefit packages to include innovative saving tools. A survey by Commonwealth found that the majority of employees agreed that employer-offered savings tools would encourage them to work harder at their jobs (62%), be more productive (62%), miss less work (55%), and would make them more likely to stay with a company (76%).
Conclusion
For too long, workers’ financial struggles were a problem to be solved at their kitchen tables. Companies are in a unique position to help their workers handle financial burdens. In order to turn the tide on financial insecurity, employers need to strengthen and build upon traditional benefit packages. Timothy Flacke, the Executive Director at Commonwealth, summarizes the situation perfectly, stating “Our research and that of others has shown repeatedly that when an individual is worrying about finances, it affects stress levels and job performance. It has also shown that savings is the foundation of financial security; access to quality savings tools is essential to achieve the relative financial stability enjoyed by those higher on the income spectrum.”
If companies commit to taking steps to develop new savings strategies, they will likely realize a host of benefits too, including reduced turnover and higher productivity. Given the mounting consequences of financial precarity in the U.S., it’s clear that the cost of inaction is too great.
This article was written by Alison Omens from Forbes and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to legal@newscred.com.
