Monday, 17 October 2011

Establishing the business case for introducing cafeteria benefits, flexible plans, package compensation and voluntary benefits schemes

When employers started providing employees with additional forms of compensation, i.e. benefits, in addition to salary their role was absolutely considered secondary and that is why they were actually called “fringe benefits” (Torrington et al, 2008). Over the last years the role covered by benefits has constantly progressed from the position of “supporting role” towards the one of “co-star” in the hypothetical movie entitled “financial reward packages composition”.

Despite organisations actually differently design and develop their reward philosophies and practices, on the basis of the actions and behaviours they want to foster and endorse, it could, in general, be said that all of them are allocating the more and more resources to benefits. Insofar as, in some cases, the sum of money spent by organisations for their employees benefits accounts for up to 50% of the overall reward budget, with pension schemes alone having a remarkable impact on the whole reward budget (Torrington et al, 2008).
As suggested by Smith (2000) the weight of benefits paid in kind rather than in cash is also different according to the different levels of staff, with executives and senior managers receiving up to 30% or 40% of their reward packages in the form of benefits of different types.

Notwithstanding, very often employees are not so incline to appreciate the efforts made by their employers in order to provide them with these benefits (Torrington et al, 2008) insofar as many individuals also report to be unsatisfied (IRS, 2000; Thompson and Milsome, 2001).

Broadly speaking, this feeling of dissatisfaction is explained by the misalignment of what individuals value and would be expected to receive as benefits with what employers actually provide them. Thompson and Milsome (2001) concluded, then, that “traditional benefits” are not effective contributors to attract, retain and motivate most of the employees. Recent studies have rather showed that in some circumstances, namely when employees are seeking for a new job and in those cases in which individuals are more in general forced to tight their belts, a good benefits package could actually help to attract quality staff (Employees’ motivation, engagement and commitment,can benefit packages help?).

It is crucial, to this extent, do not forget that when we refer to benefits we still refer to financial reward, so that their hygiene characteristic, as intended by Fredrick Hertzberg, should not be forgotten. More in particular, misalignment notwithstanding, removing hygiene factors would surely produce detrimental effects on staff engagement and motivation.

As suggested by Torrington et al (2008), although individuals do not appreciate the efforts made by their employers in order to provide them with benefits, they would definitely suffer their removal; very likely because even though employees do not appreciate the specific benefits they receive they are, notwithstanding, by and large in favour of benefits.

Making the business case for flexible benefits
The best and only means employers could have recourse to in order their staff to appreciate the benefits they offer them is to let individuals decide the benefits they need and value the most: this is actually what cafeteria benefits, flexible plans and package compensation aim to achieve. As suggested by Armstrong (2009), in fact, flexible benefits schemes are designed by businesses in order to enable their employees to decide, within set limits, the composition of their benefits package.

Boddy (2008) appropriately places emphasis on the need for employers to design and develop flexible benefits schemes aligned with the overall and HRM business strategies. The ultimate aim of benefit packages is, then, contributing to individuals performing at the desired level and behave in the way businesses are expected them to behave. Additionally, this approach also enables employers to suit the needs of an increasingly diverse workforce whilst keeping a cost-effective approach and avoid pointless expenses for unwanted and unused benefits (Jurkiewicz, 2000; Charrier, 2000).


Indeed, flexible benefits approaches also enable employers to better satisfy the needs of the different generations working within their organisations (Parry and Urwin, 2009). Different individuals have different needs and differently value reward, so that flexible approaches, giving the opportunity to each individual to choose the benefits he/she appreciates and values the most, can clearly help organisations to avoid offering individuals the wrong benefits. Of course, the overall packages need to contain a range of benefits able to meet and match the needs of all of the generations involved.

Over the last years, driven by the tax regime and the healthcare system previously in place, flexible benefits have boomed in the US, where they are actually still well-developed and widespread (CIPD, 2010). In the UK, after a slow departure in the early 2000s, flexible benefits approaches are more recently drawing the interest of a constantly increasing number of organisations (Torrington et al, 2008). By and large, it can be said that this approach can still be considered a rather typical Anglo-Saxon phenomenon.

Flexible benefits programmes are very likely to further develop in the UK and, more in general, in those countries where the declining bargaining power of trade unions and the consequent growing focus on individually agreed reward packages with employees are characterising financial reward composition practices (CIPD, 2010).

As suggested by Furness (2006), although reward managers could find it absolutely important to introduce a flexible benefits scheme within their organisation, in order to persuade and have the required support by businesses’ boards, they need to show that resorting to such an approach is financially wise.

Furness (2006) claims that the main reasons for HR professionals wanting to introduce flexible benefits schemes are: to give individuals the chance to choose, increase the perceived value and importance of benefits and improve recruitment and retention effectiveness. It should be observed that the former two objectives would be basically pursued to the benefit of employees whereas the latter two to the benefit of employers.

It must be said that, from the employees’ point of view, benefits are definitely seen, as they are, as part of their tangible reward package, whilst the freedom given to individuals to decide what benefits they want, actually, mostly represents an intangible aspect. From this point of view, it can be said that flexible benefits schemes represent something like a mix of tangible and intangible reward. Individuals decide and have then autonomy, intangible aspect, to determine the tangible reward they want to receive. This can, clearly, contribute to let them perceive the value of the benefits they receive as even more important than that represented by their intrinsic economic value. As such, they can possibly slightly contribute to retain and attract individuals.

The introduction of flexible benefits schemes clearly needs not to be in contrast with an organisation culture and values. But also the timing of the introduction of such schemes might turn to be very important if not crucial. Introducing flexible schemes could reveal to be detrimental in organisations where the largest part of employees receive the minimum wage or salary (Furness, 2006), as well as it will definitely be inappropriate to introduce a flexible benefits plan over Christmas, in that it is very likely to produce disastrous effects (Johnson, 2006).

Hutchinson (2006) suggests that a feasibility study should be better carried out before designing and implementing a scheme; the main aim of this study being to determine if the approach is consistent and appropriate for the business and to determine the most suitable kind of programme eventually to be introduced. Ultimately, the study should essentially aim to gather the information necessary to determine which factors can positively and negatively impact the scheme introduction and what savings can be attained by its introduction and implementation.

The need for flexible benefits very much also depends on, and is influenced by, the economic and social models typical of the different areas existing across the world (Childs, 2010). In many European countries where strong social services and state pension provisions are in place, for instance, the need for flexible benefits approaches is not perceived as important.

Moreover, the fact that many national tax regimes do neither recognise nor provide incentives to operate such schemes can just further explain why this approach experiences difficulties to take off in many areas. On the other hand, in countries where social provisions are poor, flexible benefits can attract a good deal of interest. More in particular Child (2010) claims that in countries like Russia, where life expectancy is low and the government offers limited health provisions, individuals do show a considerable interest to health and medical provisions rather than for pension schemes.

However, more recently, flexible benefits approaches are catching the attention and interest of a constantly growing number of organisations across a growing number of countries, independently of their dominant reward and tax regimes.

What cafeteria benefits, flexible plans and package compensation are
Flexible benefits approaches give individuals the opportunity to actively contribute to determine the composition of their reward package. Of course, the overall reward package value is determined by the employer but, within the set limits, is the employee who decides the balance between money and benefits of his overall reward package (Torrington et al, 2008).

Armstrong (2009) points out that, once employers have defined the allowance individuals can spend on benefits, individuals can choose “within benefits or between benefits”. Over the time, employees can use their allowance to change benefits, or to change the value or quota of the benefits they already receive or opt for a combination of both of these options.

As suggested by the CIPD (2010), under genuine flexible benefits schemes individuals can either maintain their current salary whilst modifying the combination or level of benefits, or modify their salary up or down by choosing to receive less or more benefits in kind.

Approaches to flexible benefits can be either fully flexible or partially flexible. The former gives individuals a wider extent of autonomy in determining and eventually changing their packages at regular intervals. In theory, employees could renounce to all of the available benefits in exchange for cash or sensibly increase their benefits in kind in exchange for pay reduction. More often schemes are partially flexible, in these cases employers set an array of core benefits, which are considered mandatory, or to put it in another way benefits which cannot be “flexed" (Armstrong, 2009) and in addition to these another set of non-core benefits amongst which individuals have a full degree of latitude to decide if and in what proportion to receive them. Individuals might, for instance, be subject to a set number of days of holiday a year and to invest a minimum quota of their salary in the pension scheme, but they may be completely free to decide whether to benefit from, for instance, gymnasium membership or private insurance and healthcare provisions (Torrington et al, 2008).

Another approach, practically in between the fully and partially flexible approaches, and which could be called “parfully/fulltially” flexible, can be developed designing and offering staff a number of different preset groups of benefits. Individuals can choose one of them as it stands, but cannot modify its composition.

In general, offering 5/7 groups of benefits should enable employers to meet the different needs of the individuals working within the organisations. Clearly, all of the 5/6/7 packages designed must to have exactly the same financial value and each of them should be developed in order to meet the needs of the different groups or generations coexisting within the business, leaving no room for disappointment. A bespoke package for young couples with children could, for example, be composed by childcare vouchers, access to corporate or private crèche, playschools or kindergartens, additional holidays entitlement and so forth. Younger people could possibly prefer more cash, whilst elder worker would more likely welcome healthcare insurance and provisions or to be given the chance to buy additional years of pensionable service in exchange for a pay reduction (Torrington et al, 2008). Indeed, although these packages could reveal to be definitely attractive to each individual belonging to the different groups, adding in each benefits group something “different”, that is, something which to some extent is out of the “leitmotiv” of the group composition, could contribute to make the “parfully scheme” even more attractive. If young parents should, in fact, opt for a totally child-intended package they could soon miss not receiving also something more directly concerned with themselves. The opportunity to consider this aspect, actually also depends on the overall value of the benefits package.

In general, as suggested by the CIPD (2010), even though it clearly depends on the different local circumstances, amongst the core benefits of a flexible scheme are usually included: pensions, holidays, life insurance and critical illness and/or long-term disability insurance.

“Non-core” benefits can by and large be grouped in three main categories: health benefits (e.g. dental insurance), financial benefits (e.g. household or holiday insurance) and leisure/life-style benefits (gymnasium membership, childcare vouchers).

Voluntary benefits schemes
Voluntary benefits, as suggested by Childs (2010), have received much more attention in the UK in that, being essentially characterised by discounts in purchases, they well meet the UK “Green Shield Stamp mentality”.
Although it can be said that, broadly speaking, both flexible and voluntary benefits schemes offer flexibility, there are relevant differences between the two approaches (Furness, 2006).

Voluntary or affinity benefits are basically represented by products and services which employees can purchase through their employers, usually at discounted prices, and which, very often, are not included in the individuals’ taxable income. Extra perks, discounted products and services offered to the workforce on the basis of a voluntary scheme are, then, offered at little or no additional cost for the employer. Basically the difference between flexible benefits and voluntary benefits is represented by the circumstance that whilst in the case of a flexible benefits scheme is the employer who directly purchases the products or services involved, in the case of voluntary scheme are employees who directly pay for the cost associated with the benefits (CIPD, 2010).

Perks, products and services offered to employees under a voluntary benefits plan are, in general, paid by employees through payroll.

Benefits which can, instead, offer employers fiscally sound opportunities can be offered by means of staff salary sacrifice arrangements. In this case employees will consent to give up part of their salary in order to receive free of tax and National Insurance (NI) benefits. Actually, also employers can benefit of this approach in terms of saving, in the UK, for instance, businesses can attain financial benefits of up to 12,8% on National Insurance.

Flexible and voluntary benefits are then different one from the other, but they can actually be used on a complementary basis. Businesses offering flexible benefits, in fact, often also offer voluntary benefits schemes. In some cases, employers also resort to voluntary benefits schemes in order to explore the degree of their workforce interest towards this kind of approach and to investigate which benefits would be mostly appreciated by the individuals composing their organisations’ workforce (CIPD, 2010).

As suggested by Cripps (2006) integrating voluntary with flexible schemes will additionally enable employers to have all of their benefits delivered from one place.

Inasmuch as core benefits are determined and set by employers, most of the benefits in kind offered by employers to their staff as “non-core” benefits are similar to those which businesses could offer to their employees in the form of voluntary benefits.

Clearly, both voluntary and flexible benefits schemes can help employers to achieve their strategies and attain their business objectives, but not on their own. Flexible and voluntary benefits plans, in fact, are very likely to be successful if developed and implemented as part of a consistent and coherent total reward approach. As such, they can provide further and additional momentum and variety to the tangible side of the overall total reward quadrant.
Despite the presence of an intangible component on these schemes, namely the one providing individuals latitude about their decisions in terms of benefits composition, if not integrated in a broader and well designed total reward package, these schemes are unlikely to help employers to achieve their business objectives and endorse the desired staff’s behaviour.

Longo, R., (2011), Establishing the business case for introducing cafeteria benefits, flexible plans, package compensation and voluntary benefits schemes, HR Professionals, Milan [online].

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