CIPD - Employee benefits: an overview

Pay and reward

Revised March 2008

This factsheet gives introductory guidance. It:

outlines the recent history of benefit provision
considers why employers may want to offer employees benefits
examines some of the more common benefits offered by UK employers to their employees
explores some of the issues around strategy, communication and implementation
includes the CIPD viewpoint.

A brief history of employee benefits

Originally, employee benefits were (and are still largely) offered by employers for business reasons, moral reasons, or both. Some offered benefits because they believed that their organisation had a moral duty to look after their employees, an approach commonly referred to as paternalism. Such an approach developed from the mid-1800s and was popularised by Quaker-owned companies, such as Fry and Cadbury. Other employers saw providing a benefit as a good way of retaining their employees. However, these approaches are not mutually exclusive and many would have claimed that they provide benefits for both reasons.

At the turn of the 20th century, the state started to bring in benefits for the population, and after the Second World War, the welfare state was established providing such benefits as unemployment insurance, sick pay and state pensions. Many of the benefits are universally provided as a safety net and many organisations built on this provision by offering their own pension or health arrangements to employees.

During the 1980s, for political and economic reasons, the welfare state was reined back and many state benefits became means tested. Also around this time, employers started to adopt a more individualistic approach to how employees were rewarded, transferring more of the risk (and, potentially, reward) and cost of the provision to their workers. With pay, there was a move away from collective bargaining and service-related increments to performance-related arrangements, while benefit provision saw a shift from final salary pension schemes to money purchase plans and from fixed benefits to flexible and voluntary arrangements.

At the same time, benefits were no longer regarded solely as a retention tool. Research in the 1990s showed that there were many factors in an organisation’s employment proposition that attracted, retained and engaged their employees. And that what made them attractive depended on the individual employee’s circumstances, such as age, caring responsibilities, age, etc. This led to the concept of ‘total reward’, that organisations should adopt a bundle of mutually supporting financial and non-financial rewards (such as flexi-time or home working) that are aligned to the needs of the organisation and its employees. Such an approach has led many employers to regard employee benefits as a strategic tool to help align employee behaviours with business objectives by using them to attract, retain and engage the talented individuals that they need now and in the future. Our factsheet on total reward has more information on this topic.

Go to our factsheet on Total reward

A recent development in benefit provision is the concern among some employers about whether their employees are in a position to adjust to this new benefit landscape where they shoulder more of the risk (and reward). There is a belief that if employers are going to give employees more freedom and choice they also have a moral duty to help educate employees about the possible consequences of their benefit choices and to help them make better informed decisions around what level of savings or health coverage they will need throughout their employment lifecycle. Employers considering whether there is a business case for them to offer generic financial advice (or financial education) to their employees should see our Workplace financial education report.

Go to our report on Workplace financial education

Cash or benefits?

Some employers decide that rather than offering employee benefits, they will provide extra cash instead and employees can use this to buy those benefits that best reflect their individual circumstances. Such an approach, often referred to as clean pay, is easily communicated, understood and administered.

However, on the downside, it has no retention factor and staff could:

end up spending more money buying their own benefits than it would have cost the firm to buy on their behalf
spend work-time hunting around for the best deals
make bad decisions
expect a certain benefit to be provided.

Additionally there are some benefits that are tax-advantaged. While clean pay may not suit all organisations, employers should consider whether, given their particular circumstances, it makes business sense to spend resources providing benefits to employees or it should let employees make their own arrangements.

There are a number of tax-advantaged benefits that it may be worth employers consider providing, namely: pensions; childcare vouchers, home computers, financial advice and bicycles.

Pensions – staff can obtain income tax relief at their highest marginal rate and employers are able to offset the contributions against corporation tax. Many firms are considering salary sacrifice arrangements for their occupational pension schemes (see below). To encourage employees contributing to the occupational pension scheme, some employers match what their employees pay in. Others link their contribution levels to employee length of service as a way of rewarding employee loyalty. There a number of occupational pension arrangements – see our factsheet on pensions for more infromation on this topic.
- View our Occupational pensions factsheet
Childcare vouchers – employers can pay up to £50 a week in vouchers and be exempt from paying any national insurance contributions (NICs) on that sum. While the employee does not have to pay any NICs and income tax on the vouchers provided.
Home computing initiative (HCI) – this government initiative was scrapped in April 2006 but employers with such arrangements in place before that date can still operate them until their scheme ends. Under the plan, firms could offer up to £2,500 worth of computing equipment to staff. Employers could lease the equipment from a government-backed home computer initiative scheme supplier, and then lease it onto the employee at no cost to the firm. Lease costs could be no more than £500 per year which were then deducted from the employee’s salary and no tax or NIC was paid on these repayments. The employer owned the equipment but could sell it for as little as £50 to the employee. The cost of setting up the scheme could be reduced by using a salary sacrifice arrangement.
Bicycle loans – employees can save up to half the cost of bicycle and accessories for commuting to work. The firm buys the bicycle and leases it to the employee and at the end of the lease period the employee can buy it 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).
Other tax free benefits include: season ticket loans, worth up to £5,000 to cover the cost of public transport; an annual party, worth up to £150 per head; and independent financial information, worth up to £150 per employee.

Salary sacrifice

This is where an employee gives up part of their gross salary due under their contract of employment and in return their employer agrees to provide a benefit. For instance, under a pension salary sacrifice scheme the employee sacrifices part of their pay, in return, their employer makes an equivalent contribution to the pension. This way the employee saves on income tax and both the employer and employee saves on the NIC. The employer can use the NIC savings to run the sacrifice scheme or to top up the employee’s pension. Our 2008 reward management surveyfinds that 29% of employers operate salary sacrifice for their employees’ pension schemes. Employers within the private sector are more likely to have adopted such an arrangement, as are those with more than 5,000 employees. Around half of employers operating salary sacrifice pass on their NIC savings to their employees while the remainder retain it.

See our annual reward surveys

However, organisations will need to consider the implications for employees and the impact on their entitlements to working tax credit, child tax credit, state pension and maternity pay. There are also national minimum wage implications. For more information visit the HM Revenue & Customs (HMRC) website (see the Useful contacts section below).

Holidays and time off

By law, employees and workers are entitled to four weeks’ paid annual holiday though many organisations have paid holiday entitlements above the minimum level.

Currently, there is no statutory right to paid leave on bank or public holidays; it depends upon what is provided in the contract of employment. However, many workers are entitled to pay on bank and public holidays as a result of implied or express contract terms and many employers do in practice give the statutory bank and public holidays in addition to the four week legal entitlement. Under the Work and Families Act 2006, the government plans to increase statutory holiday entitlement from 20 to 28 days for full-time workers (pro-rata for part-time workers). This is to implement its commitment to make paid time off for bank holidays additional to the current holiday entitlement.

Employees are also entitled to other types of time off work including maternity, paternity, adoption and parental leave, time off for public duties such as jury service, time off for trade union duties, and time off for study or training. In many cases there are qualifying conditions and most rights apply only to employees, though some extend to workers. As with holidays, employers often provide more generous entitlements than required by law.

For more information on holidays and time off, see our factsheet which gives an overview of work hours and holidays.

Go to our factsheet on Working time and leave

Healthcare and group risk-benefits

These are paid for and provided by employers to ensure both the welfare and productivity of their employees. The more common types identified by our recent research:

occupational sick pay: many employers provide sick pay that is more generous than that is provided under the state’s statutory sick pay scheme.
private medical insurance (PMI): most employers offer this benefit typically restricting it to senior employees. It allows key individuals to be treated, recover and return to work from a medical complaint a lot quicker than they would have been if they went via NHS, so minimising the disruption to the organisation of a medical-related absence.
life assurance: pays out a lump sum to a dependant on the death of an employee before retirement.
permanent health insurance (PHI) or long-term disability (LTD): provides a replacement income, as a proportion of salary, to employees who are off work through long-term illness between leaving employment and normal retirement age. The award is subject to a medical report and usually offsets state incapacity benefit.
critical illness insurance (CII): similar to PHI, but instead provides a lump sum to the claimant that is supposed to cover them until they retire. From an employee perspective, CII can be more useful that PHI if they have a terminal condition. From an employer perspective, unlike PHI, CII provides a clear break with the claimant.
employee assistance plan: is a confidential helpline for employees who have work or home related problems. Our reward management survey has noted a growth in EAPs due to concerns about employee absence and stress management. However, this expansion may slow down if HMRC decides to tax them.
dental insurance: is one of the fastest growing benefits according to our latest reward survey.

Company cars and cash allowance

Many organisations provide employees with a company car, either because the job needs it (for example, a district nurse) or as to recognise the status (job, grade or salary level) of the employee (for example, HR director). Such vehicles are taxed by the HRMC according to the make and mark of the vehicle and its CO₂ emissions. The popularity of the company vehicle has suffered with the shift in the basis of taxation from mileage to carbon dioxide emission. However, recently, due to corporate manslaughter issues, employers have decided to reduce and manage this risk by moving back to company car provision. See our factsheet on company cars for more information.

Go to our Company car policies factsheet

Voluntary and flexible benefits

Just over one quarter of employers offer their employees access to a voluntary benefits plan. Under such an arrangement, employers give their staff the opportunity to purchase from their post-tax income third party goods and services at a discount rate. At present, our research reveals that they are popular with larger, private sector employers. Organisations can either organise and publicise the discount arrangements themselves, or outsource it to a third party. Increasingly, employers are allowing employees to salary sacrifice to take advantage of government-backed initiatives such as childcare vouchers.

By contrast, a flexible benefit scheme is any arrangement that gives employees a choice over the mix of cash and for benefits they receive from their employer. Unlike benefits provided under a voluntary scheme, benefits under a flexible scheme are paid for by the organisation. Unlike benefits that are flexible (such as buying or selling holiday entitlement), flexible benefits allow staff to flex between three or more benefits (such as trading down on a company car and trading up on holiday entitlement). Just over one in ten employers offer this type of arrangement, however they are far more prevalent among larger, private sector, organisations where the administration and technology costs are more manageable. For more information see our factsheet on flexible benefits.

View our Flexible benefits factsheet

Given the potential for NIC and tax savings to both the employee and the organisation to be gained from these types of salary sacrifice arrangements, it is surprising that such schemes are not more widespread.

Strategy, design, communication and launch

According to our latest reward survey (see link above), 33% or organisations intend to introduce a new benefit for staff in 2008. Before organisations consider introducing new benefits, it is important to consider:

Why are you doing this? How does it support the business goals of the organisation? How does it reward the values and behaviours that the organisation need?
How does it fit into the HR and reward strategy? Does it support the people management and development practices that your organisation requires to be successful?
Would employees value the change? Have you researched employee views? Have you sought their opinion on the changes?
How is the benefit going to be launched? How is it going to be communicated? Who are the key stakeholders and how are they going to be involved? Does the launch and communication team have the required skills and knowledge?
What is the message? How will you explain what is being introduced and why to employees and their front line managers? How will you educate them in how the benefit will work and what they need to do? How will the benefit be communicated on an ongoing basis to existing and potential employees?
If you have developed an implementation and communication plan for the introduction of the new benefit, how flexible is it to changes in the business environment?
What are the factors that you will assess whether the benefit is successful in supporting the organisation? What measures and targets will you use on an ongoing basis to review its applicability?

Communication

When it comes to staff benefits, research shows that the better they are communicated, the more staff appreciate them. CIPD research shows that most communication activity still takes place at the recruitment, selection and induction phase. However, those organisations that are adopting a ‘total reward’ approach communicate on an ongoing basis via paper or online benefit/total reward statements as well as via email, workshops and presentations. That way employees are aware of the benefits on offer and appreciate and value them according to their individual circumstances and needs. Unfortunately, it appears that more resources go into the design of the benefit and too little attention is given to how it will be communicated at launch and on an on-going basis.

CIPD viewpoint

Employee benefits should be provided to support the business goals of the organisation by attracting and/or encouraging the behaviours and values that it needs to be successful – attract, recruit and engage. Organisations need to examine what their existing and future employees need and want and how best they can meet these.

Once this has been established, and the appropriate benefits selected and provided, employers need to:

communicate, on an ongoing basis, to their employees what is being provided and why so that employees are aware of the benefits and appreciate and value them
consider whether employees have the right knowledge, skill and attitudes to make informed decisions and whether they need to foster financial awareness
establish targets and measures against which to assess how well the benefit is supporting its aims and objectives and so it can make any necessary adjustments.

Useful contacts

HM Revenue and Customs

Employee benefits: an overview