Using Discrete Choice and MaxDiff to Spend HR Dollars Wisely

Especially in times of shrinking budgets, it is critically important to allocate benefits dollars wisely.  Human Resources departments have the opportunity to use customer-focused approaches to maximize ROI.  Techniques such as Discrete Choice Analysis and MaxDiff can help companies maximize employee satisfaction for each dollar spent.

The Challenge
Many companies conduct routine surveys about employee satisfaction, perhaps even having employees rate benefits they are considering offering (or reducing) in hopes of finding out what matters most.  But, often, the results produce ties… people want it all.  As companies face decisions about what to offer, they must make trade-offs:

  • “Should we offer better health coverage or a richer 401(k)?”
  • “Should our health plan include a lower co-pay or a lower out-of-pocket ceiling?”
  • “If costs are the same, which would contribute more to employee satisfaction and retention:  an extra week of vacation or a long-term disability plan?”

Better Options: Discrete Choice Analysis and MaxDiff
Market research techniques can help HR do a better job at making these difficult and costly decisions by having the “customers” (i.e., the employees) make the trade-offs.  Research techniques that are more typically used in product and service development for end-users can also be used with employees. 

Two such techniques – discrete choice analysis and maximum difference scaling (“MaxDiff”) – can be used to measure these types of employee benefit trade-offs. 

MaxDiff Helps Focus on the Right Parts of the Package
In MaxDiff, the employee makes trade-offs across individual benefit categories to determine the most preferred. A MaxDiff study starts with the list of items we want to prioritize, such as potential employee benefits.  From that list of items, we just show the employee a smaller subset of items at a time and have them choose the most and least important in that subset.  For instance, a MaxDiff question might ask an employee:

After asking a series of these questions with different mixes of benefits, and by analyzing patterns of response across the subsets, we can calculate a MaxDiff score for each item, representing the relative importance of each. Benefits that might make sense to take into a MaxDiff could be those which, at a high level, would help us determine which aspects of employee packages are most worthy of investment:  retirement plans, health insurance, life insurance, flexible hours, work-from-home options, etc.  Alternatively, they might be at a micro-level, such as which benefit “extras” are most valued:  free soda, company-provided Friday lunch, monthly parties, 15-minute neck and shoulder massages at lunchtime, weekly yoga classes, etc.

Discrete Choice Analysis Helps Design the Details of a Package
Discrete choice analysis is often used in service design and allows us to examine specific levels of benefits, by examining the trade-offs people are willing to make (and that companies have to make).   It asks respondents to select a favorite offering from a set.  Then, it changes the elements of the offers over and over, continuing to ask for favorites.  For instance, employees might need to choose between three hypothetical health plans:
A. $50 co-pay for routine visits; $5,000 maximum out-of-pocket; and no extra services
B. $25 co-pay for routine visits; $10,000 maximum out-of-pocket; and vision and dental
C. $75 co-pay for routine visits; $3,500 maximum out-of-pocket; and dental

As you can see, the employee has to make a trade-off and cannot have the best co-pay, out-of-pocket, and extras.  Through a series of similar questions that would include many other health plan features and trade-offs, we can analyze each person’s responses and quantify his/her value system – how much each level of each benefit is worth.  Then, we can predict the person’s preference for any health plan configuration.  Finally, we can combine all responses from all respondents and use a predictive simulator to identify winning combinations that maximize satisfaction/preference at set cost thresholds.

The Impact of Discrete Choice and MaxDiff
Leading organizations in financial services, temporary staffing, and mergers and acquisitions have used these advanced research techniques successfully to model employee preferences for health insurance, retirement plans, and compensation package elements.  They have used the results to focus their energies on the aspects of employee benefits that are most important to attracting and retaining talent, to allocate resources wisely, and to select benefits packages that provide the best balance between employee satisfaction and cost.

Sawtooth Technologies Consulting Group helps solve complex business problems by shedding light on your market. Our team has decades of experience in applying conjoint and discrete choice analysis, segmentation, MaxDiff, and other advanced quantitative research methodologies to generate insights that lead to better-informed business decisions.  Read more about our services or more of our practical blog postings.

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