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Press Office

31 May 2005

Written by Charles Cotton, CIPD Reward and Employment Conditions

This feature originally appeared in Business Network Magazine, in May 2005.

In this era of skills shortages, it’s harder than ever for smaller firms to lure the top talent. But there are ways to attract staff without breaking the bank. Charles Cotton presents 10 ways to help you compete with the biggest corporations

More than four in five employers are hoping to hire staff, according to a recent Chartered Institute for Personnel and Development (CIPD) report. But against a backdrop of the highest employment rates in a generation, over half of these companies are also worried they will experience problems in filling posts.

And it seems these fears are justified. According to the CIPD’s latest annual recruitment, retention and turnover survey, 85% of companies have struggled to recruit for at least one vacancy in the past year, and 37% of employers are responding by increasing the salaries or the value of the benefits package on offer. Yet for small and medium sized employers (SMEs) about to recruit, it can be difficult to work out what rewards will make a real difference in attracting, retaining and motivating staff.

Hard cash

A good starting point is to examine your ‘total reward’ practices. This includes all financial rewards (for example base pay, variable pay, benefits and share schemes) and non-financial rewards (such as personal and career development opportunities, the quality of working life and recognition).

Traditionally, competitive pay has been regarded as a key attractor. Employers can work out what a competitive salary is from examining job adverts, buying regional or occupational salary surveys or by using a pay consultant. Each approach has pros and cons, so companies have to decide what is appropriate for them based on their particular circumstances, such as location, type of job, time and in-house resources.

While pay has been seen as important in attracting staff, benefits used to be viewed as the way of keeping them. But before deciding which benefits to offer, SMEs should decide whether to provide benefits at all. ‘Clean pay’ is an option for new firms that don’t have a history of giving benefits and other non-cash incentives. The firm just provides a salary and, if it makes sense, a cash bonus. This is easily communicated and understood, easy to administer and is also easy to benchmark in the market. Currently, there are few tax advantages in benefits so for a bit more money you could use clean pay. As for employees, they can use this extra cash to purchase the benefits that they value the highest.

Benefit schemes

But before embarking on this approach, SMEs should be aware that there are some disadvantages. Employees could spend more money buying their own benefits than it would cost a firm to buy them on their behalf, employees could spend work time hunting around for the best deal and some individuals could still expect an employee to provide certain benefits.

There are a number of benefits that are tax advantageous. Pensions are the most obvious; staff can obtain income tax relief at their highest marginal rate and the firm will be able to offset the contributions against corporation tax. For most SMEs, either stakeholder or group personal pension schemes may be the most suitable. Under both plans you only commit yourself to how much you pay in, not how much you have to pay out. Also, as someone else runs the schemes, the administrative hassle is kept to a minimum. The advantage with a stakeholder scheme is that charges are capped (1.5% for the first 10 years and 1% thereafter). And they are fully portable, allowing individuals to transfer the fund to a personal or another stakeholder scheme without having to pay a transfer penalty.

You could consider matching what staff pay in to encourage saving, you could link contributions to the length of service to encourage retention or you could consider a salary sacrifice arrangement. Under this kind of scheme, an employee gives up part of their gross salary and their employer makes an equivalent contribution to the pension, the employee saves on income tax while both the employee and employer save on national insurance contributions.

Salary sacrifice schemes are also being used within flexible benefit schemes to allow staff to purchase additional holidays and mobile phones. However, while flexible benefits are growing in popularity, setting up a scheme can prove to be too expensive for many small firms.

An alternative is a voluntary benefits scheme. Here you offer third-party goods and services at a discount. Either you can do this yourself by approaching local firms such as the dry cleaner, the florist or the gym and negotiating a discount on your employees behalf or if you have the finances, you can get a benefits company to do this and because of their size they can get your staff national deals on such things as insurance or retail vouchers.

There are also a number of government initiatives around childcare vouchers, home computers, financial advice and bicycles that could prove attractive. With childcare vouchers, employers can pay up to £50 a week in vouchers and be exempt from

paying any national insurance on that sum. The employee does not have to pay any national insurance and income tax on the vouchers provided.]

Company car

Another common perk is the company car. These are awarded to individuals either because they need a car to do their job or as a perk. The popularity of the company car has suffered recently with the shift in the basis of taxation from mileage to carbon dioxide emission. However, despite this they still remain a popular benefit. The firm deals with all the hassle of insuring and servicing the car, rather than themselves. There has been a shift from petrol to diesel engines that are taxed more leniently. And some staff have subsequently found that they could be better off tax-wise with a company car instead of a cash allowance if the car has a low carbon dioxide emission.

Some organisations have set up employee car ownership schemes (ECOS). These allow the firm to shift the ownership of the vehicle from the company to the individual, who is not then taxed on the benefit of a company car.

Private medical insurance

This is another way in which staff can be enticed to work for your company, and has the added benefit of getting staff back to work as soon as possible after an illness, as any serious complaints are more likely to be treated quickly in the private sector than they are in the National Health Service. Knowing they are in safe hands should they fall sick is attractive for many employees, who may have taken out such insurance anyway were it not offered to them through work. Companies can also offer this facility to an employee’s immediate family, either subsidising it completely or allowing them to get company rates on health insurance.

IT equipment

Companies can also offer £2,500 worth of computing equipment to their staff. Employers can lease equipment from a government-backed home computer scheme supplier, and then lease it on to the employee at no cost to the firm. Lease costs must be no more than £500 per year and are then deducted from the employee’s salary and no tax or national insurance is paid on these repayments. The employer owns the kit but can sell it for as little as £50 to the employee.

Travel tips

Other benefits that can be provided tax free include season ticket loans, worth up to £5,000 to cover the cost of transport; an annual party, worth up to £150 per head; and independent financial information worth up to £150 per employee.

Employees can save up to half the cost of bicycles and accessories for commuting to work. The firm buys the bike and leases it to the employee, and at the end of the lease period the employee can buy the bike for the price of a month’s lease. In addition, employers can also provide tax-free meals and drinks to those who cycle to work.

Social engagements

Other low-cost but high-impact benefits include creating a company DVD/video library, work-organised outings to the theatre or a restaurant, cakes and/or a day’s guaranteed leave on a birthday, sponsoring a work’s sports team or putting on a work party. However, while these benefits work for many employers, they may not work for everyone so need to be evaluated in the light of individual circumstances.

Bonus payments

While pay was seen as the key to hiring in the CIPD survey and benefits as vital in retaining staff, bonus and incentive schemes and share plans were regarded as the best ways of motivating employees. Around two-thirds of companies offer their employees a bonus to recognising their past performance or an incentive scheme designed to encourage future performance.

From an organisational perspective, the advantages of offering a non-consolidated award is that firms can encourage employees to achieve certain organisational goals, pay them without inflating the pay bill each year, and only have to pay out when there is money coming in. From an employee perspective, they may prefer a lump-sum payment over a pay rise spread over a year.

Such schemes can undoubtedly influence employee behaviour, but there are also studies demonstrating potential problems with bonus and incentive schemes. These include when they are used in inappropriate situations and where they only serve to encourage and reward counter-productive behaviour. So firms should not offer such a scheme because “it’s what the competitors do” unless it can fully analyse its specific situation, assess the risks and benefits of using various schemes and then develop one that best meets the needs of the firm and its employees.

Share ownership

Another motivator is share ownership. The aim is to encourage employees to act like owners and become more business aware. While share plans are growing in popularity in listed companies, they are less common in private companies due to the absence of a market for the shares, a lack of facilities to monitor share price and concerns over people who have left the organisation continuing to retain shares.

But many private companies operate share plans very successfully, often with higher levels of employee engagement and contribution than listed companies. There are solutions to all the issues outlined above and private companies have the advantage of not being constrained by Stock Exchange rules and institutional investor guidelines. There can also be national insurance savings.

Personal development

But before getting the cheque book out, research shows that while pay and benefits are important in recruiting, retaining and motivating people, they are only part of the story. Employees are also attracted to non-cash rewards, such as the opportunity for personal and career development, a good physical working environment, recognition for a job well done, having an interesting, challenging and responsible role, opportunity to work as part of a team or on a flexible basis. Such rewards can also retain and engage employees.

Engagement is the new buzzword in human resources. While motivation implies being encouraged by a financial reward to perform, engagement means people work because they support the organisation and its values, their work colleagues and line managers. In other words, the motivation comes from within the individual, rather than outside that person.

CIPD research shows that what is important in getting staff, retaining and motivating them is finding the appropriate balance of financial and non-financial rewards. A study into the impact of reward practices on customer service behaviour found that if you got the financial rewards right, but the non-financial rewards wrong, most people would leave within a short space of time. If you got the non-financial rewards right, but the financial reward wrong, you kept people for longer, but they would eventually leave for more money.

Small companies need to view their employees just as importantly as they do their customers. Who are your existing and potential employees, and do you know what attracts, retains and engages them? If firms know this, they should be able to build an appropriate total reward strategy that clearly articulates to employees what values and behaviours the organisation needs to be successful and how it will reward their achievement.

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