With anything up to 25% of salary being spent on benefits, FDs can often struggle to find justification, but stop to consider issues such as retention, engagement and tax incentives, the reasoning can be tipped in perks’ favour, says Peta Hodge
Money talks, and workers understand the value of cash. Employee benefits, on the other hand, appear to have little to say to your average staff member. A recent survey by Thomsons Online Benefits – the Employee rewards watch 2008 report – found that, while it’s quite common for the benefits spend to be worth 15%-25% of payroll (and in some cases more), less than a third of employers feel this expenditure is appreciated by their staff.
In spite of this, the same survey shows that almost all employers (93%) persist in providing some level of company funded benefits beyond the statutory minimum. The big question is: Why don’t they just pay cash?
For a start, while cash can be a very useful recruitment tool, its effectiveness in retaining staff is more doubtful. Towers Perrin’s Global workforce study 2007-2008 found basic pay to be the number one factor in determining whether UK workers join a particular organisation in the first place, but it is only ninth most important in determining whether they stay.
It is also a rather one-dimensional weapon in the battle to recruit and retain; a point made by John Campbell, recently retired as director rewards & recognition, Citigroup global consumer group EMEA at Citigroup, at the Employee Benefits Conference last October. He said: “Retaining people by offering more money just encourages bad behaviours and can be offensive to people who feel like a commodity.”
“My comment was about [employers] offering money when people are on the point of leaving,” he explains. “If people think threatening to leave is the only way to get more money, then that encourages bad behaviours… it’s hindsight management and no good for the long term.”
Not that Campbell believes a cash-only approach is wrong in all cases or for all employees. “It’s a question of what makes best sense for the particular organisation,” he says. “It depends on the culture.”
“If you are operating a call centre where the average age of the workforce is 25, and the turnover is high, then it may be appropriate to go with cash,” explains Chantal Free, senior consultant with Watson Wyatt. “If you are running a long-term, expertise-based professional business [where you want your staff to stay and help develop the business]… then benefits are more likely to feature.”
The question then arises, of course, which benefits? And to answer that, employers need to be clear about why they are offering benefits in the first place.
Recruitment is one reason – although benefits don’t generally have the pulling-power of basic pay (see table, page 11).
Free points out that the effectiveness of benefits as a recruiting tool will depend on who you are trying to recruit. “For example, if you are recruiting graduates, their focus will be on paying off their debts. So the focus is on cash … When they marry and have children, things like medical benefits and childcare vouchers come into play – school fees may become an issue. Eventually, pensions become more important…”
Parked in your driveway
The status value of certain benefits for certain types of employees, should also not be underestimated. Global warming notwithstanding, company cars are the prime example of a benefit that some employees simply won’t take a job without them. “They are entrenched in our culture in the UK,” points out Graham Farquhar, partner with Ernst & Young. “As an HR director once said to me: ‘you can’t park a pay packet in your driveway’.”
Staff retention is another reason for providing employee benefits. Clearly, benefits like pensions, certain share schemes and long service awards are very specifically geared to keeping staff in service, but others may be used to create a working environment and ethos that in turn encourages staff to stay.
For example, the ‘ability to balance my work/personal life’ is one of the top five drivers of retention according to Towers Perrin – benefits such as flexible working and childcare vouchers, clearly have a part to play in delivering this.
Another top-ten driver of retention is ‘the belief that senior management values the workforce’. Virtually any benefit or package of benefits, from private medical insurance and bonuses to sabbaticals and staff canteens, could be used to reinforce this type of message – so long as it is communicated in the right way.
Benefits can be used in a similarly ‘environmental’ way to ensure employees are ‘engaged’ in the workplace – that is, contributing fully and delivering excellence. Towers Perrin suggests the benefits of engagement go straight to the bottom line. It cites a 2006 study where the operating income in a group of companies with above average engagement levels improved by 19.2% over 12 months. By contrast, a group of companies with below average engagement levels saw it decline by 32.7%.
According to the Towers Perrin research, the number one driver of engagement is the belief that ‘senior management [is] sincerely interested in employee wellbeing’. Again, benefits such as healthscreening, employee assistance programmes (telephone counselling services) and flexible working might all be part of the mix when it comes to delivering this type of working environment.
The way in which benefits are delivered may also be important in fostering staff engagement. Flexible benefits – where staff are given a budget and allowed to pick and choose from a menu of benefits – may help staff feel trusted and valued, and give them a sense of autonomy. It is also the only fair way to deliver highly valued benefits such as childcare vouchers, that only have relevance for a section of the workforce, on an employer-funded basis.
However benefits are delivered, they won’t work on their own. As the old joke says, nothing’s as hard to fake as sincerity and however good the benefits package, staff won’t believe you truly care about them if they never see you on the ‘shopfloor’ or, when they do, you can’t remember their names.
Towers Perrin’s findings clearly push employers towards considering a ‘total reward’ strategy where, in addition to pay and benefits, opportunities for learning and the general working environment are seen as part and parcel of the recruitment, retention and engagement strategy.
Of course, if benefits are to have any impact on recruitment and retention, they have to be communicated well and often. And it’s important to remember that communication is a two-way street – if you want to know which benefits your employees value most, you should ask them.
Beyond issues of recruitment and retention, benefits can also be used to achieve wider business objectives such as reducing sickness absence. The latest research from the Chartered Institute of Personnel and Development (CIPD) Absence management study (2007) puts the average cost of sickness absence at £659 per employee every year. An increasing number of employers are choosing to tackle this, not just with the sticks of return-to-work interviews and official warnings but with carrots such as subsidised gym membership, employee assistance programmes and healthy eating options in the staff canteen.
They believe keeping staff fit and well not only benefits the individual employee, but also helps the bottom line.
Wider objectives
Although such effects are hard to quantify, research carried out in 2005 (the Vielife/IHPM Health and performance study), showed an 8.5% improvement in performance over 12 months as a result of a health intervention programme and suggested the likely annual return on investment in such a programme was at least £3.73 for every £1 spent.
Employers also need to consider what impact that not having certain benefits would have on their organisation. Death-in service benefits are an obvious example: no one appreciates them until they are needed.
As finance director, it may well be you who has to deal with the grieving widow (or widower) and explain that, financially, they are on their own. Such a meeting is likely to cost you more than a few minutes’ acute embarrassment – the impact on the morale of your remaining staff will be felt for years.
Clearly there are a many strategic reasons, reflecting wider corporate objectives, why employers don’t go down the cash-only route. But there are some tactical reasons too. The most obvious of these is the relative tax and NI advantage some benefits have over cash.
HM Revenue & Customs (HMRC) has given the thumbs up to employers providing a number of employee benefits free of the tax and NI contributions that would be payable on the equivalent amount of salary. The big budget item is of course the pension, which allows staff to obtain income tax relief at their highest marginal rate and employers to offset their contributions against corporation tax.
Less valuable (but not necessarily less appreciated) tax and NI free benefits include childcare vouchers (up to the value of £55 per week); mobile phones, bicycle leasing schemes; free or subsidised meals in the staff canteen; and gym facilities as long as they are open to all staff.
Although the tax and NI savings available on certain benefits may be attractive, employers should always be wary of letting the taxation tail wag the benefits dog.
Chasing tax breaks too aggressively may have the effect of bringing an organisation to the attention of HMRC, warns Alastair Kendrick, a partner with Bourne Business Consultants. “The Revenue does risk assessments – if an employer is ‘high risk’, the Revenue might look at its activities more closely,” he says. “Employers do need to be careful not to raise their risk profile.”
Even if you stick to the letter of the tax rules, HMRC can be a fickle beast and it is not unknown for it suddenly to withdraw the tax advantage of a particular benefit. The popular home computing initiative (which enabled employers to loan home computers to staff without incurring a P11D tax liability) was a notable casualty back in 2006.
Another factor to take into account is that, while savings may be made on the tax and NI side of the equation, benefits cost more to set up and administer than pay. They are also difficult to communicate – a particular problem for the tax efficient, but unfortunately named, ‘salary sacrifice’ scheme. It takes a special kind of salesperson to make ‘salary sacrifice’ sound attractive.
The main danger with being too much in the thrall of tax and NI savings when devising a reward package, however, is that you end up with completely inappropriate benefits that neither appeal to your workforce nor deliver on wider business goals.
If benefits don’t do those two things, you might as well just pay cash.
Executive summary
• Employers commonly spend between 15%-25% of payroll on benefits, but less than a third of employers feel staff appreciate this expenditure.
• Cash salary can attract staff, but it’s effectiveness in retaining staff is more doubtful.
• Some benefits are used to create a working environment and to ensure employees are ‘engaged’ in the workplace. The operating income of employers with above-average engagement levels tend to be significantly higher than those with below-average engagement.
• The status value of certain benefits (such as cars) should not be underestimated. • Pensions, certain share schemes and long service awards are geared to keep staff in service.
• Some important benefits (such as benefits) are cheaper to offer than cash because of the tax and NI advantages.
What do employees want?
Top-10 attraction drivers
1 Competitive base pay
2 Convenient work location
3 Vacation/paid time off
4 Career advancement opportunities
5 Learning and development opportunities
6 Reputation of the organisation as a good employer
7 Challenging work 8 Reasonable workload
9 Flexible schedule
10 Competitive retirement benefits
Top-10 retention drivers
1 Excellent career advancement opportunities
2 Satisfaction with the organisation’s people decisions
3 Organisation’s reputation for social responsibility
4 Appropriate amount of decision making authority to do my job well
5 Ability to balance my work/personal life
6 Have effective job training
7 Work environment where new ideas are encouraged
8 Can impact quality of work/product/service
9 Competitive base salary
10 Belief that senior management values the workforce
Top-10 engagement drivers
1 Senior management sincerely interested in employee wellbeing
2 Improved my skills and capabilities over the last year
3 Organisation quickly resolves customer concerns
4 Appropriate amount of decision making authority to do my job well
5 Organisation’s reputation for social responsibility
6 Set high professional standards
7 Excellent career advancement opportunities
8 Organisation invests in innovative products/services
9 Can impact quality of work/product/service
10 Senior management acts to ensure organisation’s long-term success
Source: Towers Perrin Global workforce study 2007-2008
Measuring the attractiveness of benefits
Looking at the business case for benefits, Helen Craik, director of HR policy at voluntary benefits provider, Asperity, has developed the ‘fat diamond’ to quantify the relative attractiveness of providing various benefits. She measures a range of benefits against four criteria: cost; hassle; value to employer, and value to employee.
• Fat diamonds: low costs, low hassle, high employer value and high employer value. She says these are “no brainer benefit[s] employers should include in their employment package as standard, for everybody, from day one.”
• Thin diamonds: high cost, high hassle, but high employer value and high employee value. Craik characterises these as “valued but expensive, have them if you can afford them”.
• Question marks: benefits that score well against one or two criteria but the overall attractiveness of providing them is open to question.
In practice, whether a benefit comes out as a fat diamond, a thin diamond or a question mark will vary from employer to employer. But the fat diamond model – measuring benefits against the criteria of cost, hassle,value to employer and value to employee – might provide a useful starting-point for considering the business case for various benefits within your own organisation.
Back to ‘Employee Benefits Report For Financial Directors – June 2008’