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”.
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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