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Employee benefits offer a way to attract and keep people, contribute towards improving well-being and encourage required behaviours, achievements, values and skills. However, there are several factors to consider when introducing a benefit to make sure it’s valued by workers while also supporting people management practices and aligning it with wider business goals.
This factsheet explores the past and present of employee ‘perks’ from the days of paternalism to the start of the welfare state and through to today's more individualised approach. It looks at the variety of benefits employers can offer, and what to consider when implementing employee benefits as part of a reward strategy.
What are employee benefits?
Employee benefits are non-cash provisions within the reward package, although they can have a financial cost for employers, for example paid holidays, pensions or company cars.
They may be offered for business reasons, for example motivating employees to achieve organisational objectives, and/or ‘moral’ reasons based on a desire to care for employees’ well-being (and, in so doing, potentially enhance employee engagement). The prevailing financial, legal and social background also plays a role in the development and shaping of benefit policies and practices.
Our 2018 Reward management survey found that the most common business reason for providing employee benefits are to attract, recruit and retain the employees to support current business needs, while the most common external driver influencing benefit provision are legal and employment obligations and legislation.
A brief history of employee benefits in the UK
In the earliest days of UK benefit provision, some companies offered benefits because they believed they had a duty of care to their employees, a policy commonly referred to as 'paternalism'.
At the turn of the 20th century, the state introduced benefits for the general population and, after the Second World War, the welfare state was established to provide such benefits as unemployment insurance, sick pay and state pensions, as well as the National Health Service. While many state benefits continue to be provided universally as a safety net, some organisations have built on this by offering their own more generous or complementary arrangements.
During the 1970s, attempts to control the growth of pay, combined with high marginal tax rates, drove many employers to develop generous benefits provisions, especially for senior staff, to circumvent the difficulties in using fixed pay.
Since the 1980s, the tax regime for employee benefits has tightened, limiting the attractions of certain benefits over cash. However, it can prove hard to remove or downgrade them once they have become an established part of the package.
More recently, some employers have adopted a more individualistic approach to employee reward, transferring more of the risk (and, potentially, reward) and cost of the provision to their workers. Benefit provision has seen a widespread shift from defined benefit pension schemes to defined contribution plans (particularly in the private sector) and some movement from fixed to flexible and voluntary benefits.
However, employee benefits are no longer seen just as a retention tool. Research has found that what makes an organisation’s employment proposition attractive depends on an employee’s individual circumstances (such as being a carer). This has created the concept of ‘total reward’, where employers adopt a bundle of mutually supporting financial and non-financial rewards (such as flexible working) that align to the needs of the business and its employees. Such an approach has led many to regard employee benefits as a strategic tool to help attract, retain and motivate the talent needed to support the organisation’s purpose and performance. See our factsheet on strategic and total reward.
One concern of employers is whether their people can adjust to a situation where they shoulder more of the risk (and reward). As well as the moral duty some employers feel towards helping to educate staff about the possible consequences of their benefit choices, there is the business case that a financially secure workforce can bring. For more, see our Employee financial well-being report.
Types of benefits
Our 2018 Reward management survey finds that main benefits UK employers offered to either all employees or dependent on their grade, location or occupation include those covered below.
These are widespread due to legal requirements. One of the more costly parts of the benefits package, workplace pensions are often at the centre of major change.
Holidays and time off
Employers are required by law to offer certain levels of paid annual holiday, although our 2018 Reward management survey found that many offer more than the minimum.
There are also statutory entitlements to other types of time off work including maternity, paternity, adoption, parental and bereavement leave. As with holidays, many employers often provide more generous time off arrangements than required by law. See our Working hours and time off work factsheet.
Healthcare and risk benefits
These benefits may be provided to ensure both the welfare and productivity of employees. Our 2018 Reward management survey found that the common types of benefits include:
- Occupational sick pay.
- Employee assistance plans.
- Death in service/life assurance.
- Eye care vouchers.
- Gym (on-site, subsidised or discounted membership).
Some benefits are given to all (such as occupational sick pay), while others (private medical insurance for instance) are dependent on factors such as grade, occupation or location.
Group risk insurance policies, including group life assurance, group income protection and group critical illness, transfer some of the risk to a third party.
Company cars and car allowances
Many organisations provide a company car, either because the employee’s job needs it (for example, a sales rep) or to recognise the job’s status (for example, director). Such vehicles are taxed according to their CO2 emissions. Some employers prefer to pay a cash allowance to help employees with the purchase of cars or compensate them via mileage allowances for using their own vehicles, rather than supply a company car.
Employers may offer a diverse range of other employee benefits including: unlimited holiday, concierge services, free or subsidised staff canteens, and a nap room. See more on the variety of staff benefits on offer, in our 2018 Reward management survey.
Taxation and salary sacrifice provisions in the UK
Certain employee benefits attract preferential tax treatment, often in line with government policy to encourage or support certain choices (as, for example, with pensions or cycle-to-work schemes).
Under salary sacrifice arrangements, an employee gives up part of their pre-tax salary and in return the employer agrees to provide a benefit. For instance, under a pension salary sacrifice scheme the employee gives up part of their gross pay while, in return, the employer makes an equivalent contribution to the pension. This means that the employee saves on income tax and both the employer and employee save on national insurance contributions. The employer might use the NICs savings to help run the scheme or to top up the employee’s pension.
However, organisations should consider the implications of salary sacrifice arrangements for employees in respect of provisions such as working tax credits/universal credit or the national minimum wage.
The tax position on employee benefits and salary sacrifice may change. For up-to-date information, see the HMRC website.
Choices in benefit provision
Cash or benefits?
Some employers prefer to provide cash to enable employees to purchase those benefits that best meet their needs. This approach, often called ‘clean pay’ is easily communicated, understood and administered.
However, on the downside, staff could:
- Spend more money buying their own benefits than it would have cost the organisation to do on their behalf.
- Spend work time searching for the best deals.
- Make poor choices.
Flexible and voluntary benefits
Flexible and voluntary benefits schemes both aim to offer employee choice by providing flexibility over individual benefits packages, but it’s important to distinguish between them.
Flexible benefits arrangements (known also as ‘cafeteria benefits’ or ‘flex plans’) allow staff to vary their package to meet their own needs. The dividing line between pay and benefits is less fixed than in standard reward packages. In most schemes, employees are able either to retain their existing salary while changing the mix of various benefits they receive or move their salary up or down by taking fewer or more benefits.
Voluntary benefits (also known as affinity benefits) allow employees to buy products and services, usually at a discount, through their employer out of their own taxable income or through a salary sacrifice arrangement. These schemes differ from flexible benefits as the employee pays for the cost of the benefits. Under voluntary benefits schemes, although the employer does not pay for the benefits provided, it may incur research, administration, communication and launch costs.
Such initiatives can align with the increased focus on reward individualisation, help address inclusion and diversity, be cost-effective and assist in the harmonisation of reward practices, especially during a merger or acquisition. In practice, both flexible and voluntary benefits schemes may be used by the same organisation.
When planning to introduce ‘flex’, it can be useful to start by offering benefits on a voluntary basis – though sometimes the planned move to flex never happens. The idea is that this allows organisations to test the popularity of various benefits, design and fine-tune their subsequent scheme.
When offering these schemes, it’s important that the choices, and their consequences, are made clear to employees. If the options are seen as complicated, or the method of making choices as difficult, then individuals may just keep their existing benefits package and much of the resource spent introducing the scheme will have been wasted. In some instances, it may be more appropriate to offer a limited but meaningful choice of options. Our report Show me the money! The behavioural science of reward has more on how employees may respond to choice.
Strategy and implementation
Before introducing, revising or removing a benefit, it’s important for people professionals to ask:
Why is the organisation introducing/offering the benefit? How does it support the organisation’s business goals? How does it reward the values and behaviours needed?
How does the benefit fit into the HR and reward strategies? Does it support the people management and development practices the organisation requires?
Will the change be valued by current and future employees? Have their views been researched?
How will the benefit will be launched? Who are the key stakeholders and how will they be involved? Does the launch team have the required skills, knowledge and support?
How will the organisation explain what is being introduced and why to staff and line managers? How will the benefit be explained to staff, including what they must do? How will the benefit be communicated on an ongoing basis?
How flexibile are the implementation and communication plans to changes in the business context?
Do employees have the knowledge, skill and attitudes needed to make informed decisions? Is there a need to invest in financial awareness?
What factors will be used to assess whether the benefit successfully supports the organisation’s goals?
Useful contacts and further reading
Books and reports
PERKINS, S.J. and WHITE, G. (2020) Reward management: alternatives, consequences and contexts. 4th ed. London: Chartered Institute of Personnel and Development.
ROSE, M. (2018) Reward management: a practical introduction. 2nd ed. HR Fundamentals. London: CIPD and Kogan Page.
Visit the CIPD and Kogan Page Bookshop to see all our priced publications currently in print.
BARTON, T. (2016) How to determine which group risk benefits best suit an organisation. Employee Benefits. 27 July.
BASKA, M. (2018) Businesses ‘throwing money down the drain’ by not communicating employee benefits. People Management (online). 27 July.
COLEMAN, A. (2015) Flex into the future. Employee Benefits. January. pp22-23.
HOWLETT, E. (2020) What benefits should you be providing to home workers? People Management online. 26 October.
LEWIS, D. (2017) Is this the end of employee benefits?People Management (online). 27 April.
CIPD members can use our online journals to find articles from over 300 journal titles relevant to HR.
Members and People Management subscribers can see articles on the People Management website.
This factsheet was last updated by Charles Cotton.
Charles Cotton: Senior Performance and Reward Adviser
Charles directs the CIPD's performance and reward research agenda. He has recently led research into: how employers can help improve their employees’ understanding of their personal finances; how front line managers make and communicate reward decisions to their employees; how employers manage the risks around reward; how private sector employers can build the business case for workplace pensions; how employees form their attitudes to pay; and how the annual pay review process can become more strategic.
He is also responsible for the CIPD’s public policy reward work and has given evidence to select committees on banking pay, redundancy awards as well as responding to various consultations, such as on pensions, retirement and MPs’ expenses.
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