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The road to reward

Attracting and retaining talent is a major challenge for UK employers. The battle to increase productivity while delivering cost-efficiencies is driving change in companies’ employee benefit strategies. MB provides an overview of employee benefits.

Popular HR wisdom, backed up by respected psychologists and employment commentators, suggests that money is not generally the main motivator for employees. Satisfaction in the workplace depends on much more than our annual salary and, according to American psychologist Abraham Maslow, is only one of many ‘hygiene factors’ that determine whether or not we are happy at work. Maslow’s Theory of Human Motivation included his acclaimed ‘Hierarchy of Needs’, which outlined the most fundamental requirements for human satisfaction. It was written in 1943. Despite vast societal and technological evolution since then, its most salient messages still appear to resonate today.

The concept of benefits beyond salary is cemented into the modern workplace. ‘Employee benefits’, defined by the Chartered Institute of Personnel and Development (CIPD) as “non-cash provisions within the pay and benefits package, although they have a financial value or cost for employers”, have traditionally been regarded as a vital component in staff retention. In many cases they have been considered a moral obligation for employers.

In the 1970s, employers increasingly looked towards developing more generous benefits packages rather than rewarding employees via basic salary. But in recent years, as tax legislation has tightened its grip on non-cash provisions, the attraction of certain benefits over salary has been diluted. In response, employers have begun to adopt a more individualistic approach to how employees are rewarded and transferred more of the risk – and cost – of benefits onto their workers. For example, the days of Final Salary pension schemes are now all but over and have been replaced by the offer of money purchase plans for employees. At the same time, more employers are moving from fixed benefits to flexible and voluntary arrangements.

There is little doubt that the global economic downturn has had a demonstrable impact on the employment market and, by association, the employee benefits landscape. Across the board, companies are adopting a twin focus in which they are trying to balance a drive for productivity gains against the need to deliver cost-efficiencies. As such, employers need to attract and retain talent but, at the same time, secure the best possible return on investment with their human resource. Sustaining staff motivation and employee engagement during turbulent times is a major challenge for modern businesses. Benefits are, of course, one of the key weapons employers have at their disposal to address employee engagement; but with a widespread determination to control costs, companies are needing to be more creative in how they shape employee benefits packages.

Total rewards

The past year has seen a significant shift in the way companies are designing and presenting benefits packages to employees. According to a survey carried out by the UK magazine Employee Benefits, there is a growing trend towards the use of ‘Total Reward’ strategies among British companies. The poll, conducted in March 2011, showed that 45% of respondents received a benefits package that had been presented to them as a Total Reward scheme – an increase from 29% in 2010. CIPD defines Total Reward as a concept that “encompasses all aspects of work that are valued by employees, including elements such as learning and development and/or attractive working environment, in addition to the wider pay and benefits package.”

Total Reward is considered to be distinct from Strategic Reward, which, according to CIPD, is based on “the design and implementation of long-term reward policies and practices to closely support and advance business or organisational objectives, as well as employee aspirations.” But, says CIPD, strategic and total reward may often work in partnership. “An organisation might adopt a total reward approach encompassing the provision of both cutting edge training programmes together with flexible working options – as well as more traditional aspects of the pay and benefits package, in order to recruit, retain and motivate the high quality staff that are best placed to help it secure its business objectives.”

Changes to benefits packages are being driven by market dynamics in the wider business environment. The Employee Benefits 2011 survey identified the following issues as being instrumental in determining benefits packages this year:

• Improving the perceived value of the benefits package.

• A drive to control costs across the organisation.

• Making benefits expenditure more cost-effective.

• Matching benefits to employee need.

• Ensuring benefits are competitive.

• Improving the effectiveness of the benefits package.

• Harmonising benefit terms and conditions across the organisation.

• Drive to reduce costs across the organisation.

• Managing pension costs or deficits.

• Encouraging pension scheme take-up.

These findings illustrate a diversity of considerations for managers responsible for employee benefits, and highlight the tensions between fixed, flexible and voluntary arrangements – as well as the challenges of balancing individual rewards for star performers against the desire for an organisation-wide template.

Feeling the benefit

Traditionally, employee benefits packages generally comprised the usual suspects: pensions, paid holidays and company cars. But today, the benefits market has expanded to include a wide array of arrangements that match the changing needs of modern society. So what kinds of benefits are included in a contemporary Total Rewards plan? The most common benefit is Life Assurance/Death in Service, which seems to be offered to all employees by the vast majority of employers. Alongside this, and perhaps in line with the thinking behind a Total Reward approach, most companies consider training and development to be an employee benefit and, again in the main, provide it to all members of staff. It is arguable whether employees themselves regard this as a significant benefit or simply as a natural and expected aspect of any job of work.

Behind Life Assurance and training and development, the Employee Benefits survey showed that more than two thirds of benefits packages (70%) include counselling/Employee Assistance Programmes (EAPs) – a benefit that appears to reflect modern demands in an era where many individuals are burdened with high levels of debt and stress, as well as being exposed to increasing instances of redundancy. The survey’s authors say that EAPs have now become a mainstay of many employers’ core benefits, having grown in popularity in the past few years. In 2004 only 30% of its survey respondents’ benefits packages included EAPs. Other popular benefits include childcare vouchers, extra holidays for long service and the option of additional voluntary pension contributions.

Outside of the core options, companies offer a wide range of additional benefits to their employees on an all-inclusive or selective basis. Some examples are listed below.

Typical benefits
Income protection
Private medical insurance
Optical care
Health screening
Personal accident insurance
Concierge services
Season ticket travel loan
Bicycle rental/loan
Retail discounts
Car parking
Dental insurance
‘Give as you earn’/payroll giving
Student grants/repayments
Professional body subscriptions
Lunch vouchers/subsidised staff canteen
Gym membership
Pet insurance

Taxing measures

Some employee benefits attract preferential tax treatment, often in line with government policy to support lifestyle choices – for example, childcare vouchers and cycle-to-work schemes. Alternatively, employees may enter into a salary sacrifice arrangement. Under such agreements, an employee gives up part of his/her gross salary in return for the employer agreeing to provide a benefit. For example, under a pension salary sacrifice arrangement, a member of staff gives up a percentage of their salary while the employer makes an equivalent contribution to the employee’s pension. The employee saves on income tax, while both employer and employee save on National Insurance contributions. However, salary sacrifice agreements may have implications for other provisions such as working tax credits or the national minimum wage. CIPD advises parties considering such arrangements to visit the HM Revenue and Customs website for further information.

Next month, MB looks at incentives and motivation. For further information on employee benefits, go to www.cipd.co.uk. To download a copy of The Benefits Research 2011, visit www.employeebenefits.co.uk.

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