Outlines the main characteristics of strategic and total reward, and looks at designing and implementing a reward strategy across the organisation
Employee benefits offer a way to attract and retain people, contribute towards improving well-being and encourage required behaviours, achievements, values and skills. However, there are various 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 to employee benefits. It looks at the variety of benefits employers can offer, and what to consider when implementing employee benefits as part of a reward strategy.
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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 finds 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
Traditionally, employers provided benefits to retain their people (after pay had attracted them initially) or because they felt a moral obligation towards their workers.
In the earliest days of UK benefit provision, some companies offered benefits because they believed they had a duty to look after their employees, a policy commonly referred to as paternalism. Such an approach developed from the mid-1800s and was popularised by (then) Quaker-owned companies.
At the turn of the 20th century, the state began to introduce benefits for the general population and, after the Second World War, the welfare state was established to provide a comprehensive array of benefits including unemployment insurance, sick pay and state pensions, in addition to the foundation of the National Health Service. While many state benefits have continued to be universally provided as a safety net, organisations have tended to build on this provision by offering their own more generous or complementary pension and health arrangements.
During the 1970s, the implementation of an incomes policy controlling the growth of cash pay, combined with high marginal taxation levels, drove many employers to develop generous benefits provisions, especially for senior staff, to circumvent the difficulties in rewarding employees via fixed pay.
Since the 1980s, the taxation regime surrounding employee benefits has tightened, limiting the attractions of certain benefits over cash. However, it can prove difficult for employers to remove or downgrade certain benefits 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. With pay, there has been a move from collective bargaining, across-the-board pay rises and service-related increments towards performance-related pay and incentives, while 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.
Employee benefits are no longer regarded simply as a retention tool. Research indicates that there are many factors in an organisation’s employment proposition and what makes them attractive depends on the individual employee’s circumstances (such as caring responsibilities). This has led to the concept of ‘total reward’, where organisations 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 assist recruitment and retention, and align employee behaviours and business objectives. See our factsheet on strategic and total reward.
One concern of employers is whether their people are in a position to adjust to the new benefit landscape where they shoulder more of the risk (and reward). As well as the moral duty some may feel towards helping to educate their staff about the possible consequences of their benefit choices, there is the business case that a financially well workforce can bring to the organisation. Our Employee financial well-being report has more on the advantages this brings.
Types of benefits
Our 2018 Reward management survey finds that main benefits employers offered to either all employees or dependent on their grade, location or occupation include those covered below.
Due to legal requirements, these are now widespread. One of the more expensive parts of the employee benefits package, workplace pensions are often at the centre of major change across all sectors.
Holidays and time off
Employers are required by law to offer certain levels of paid annual holiday, although our 2018 Reward management survey finds that many offer more than the minimum.
There are also statutory entitlements to other types of time off work including maternity, paternity, adoption and parental leave, while other leave arraignments are not supported by legislation, such as bereavement. As with holidays, many employers often provide more generous time off arrangements than required legally. 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 finds that 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)
- flu jabs
- healthcare cash plans
- private medical insurance
- permanent health insurance
- critical illness insurance
- dental insurance.
Some benefits tend to cover all employees, such as occupational sick pay, while others are dependent on such factors as grade, occupation or location, such as private medical insurance.
Group risk insurance policies, including group life assurance, group income protection and group critical illness, transfer some of the risk to a third party. They are a benefit that can be highly valued by employees as well as providing access to a wide range of extra support at relatively low expense. Employers should seek expert when setting up or changing a group risk insurance scheme to ensure optimum cover is provided and all tax efficiencies are maximised.
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 employee’s status (for example, director). Such vehicles are taxed by the HM Revenue & Customs (HMRC) according to their CO2 emissions. Some employers may prefer to pay a cash allowance to employees to assist with the purchase of cars or compensate employees via mileage allowances for using their own vehicles, rather than directly supply a company car.
Employers may offer a diverse range of other employee benefits including: unlimited holiday, concierge services, free or subsidised staff canteens, bring your dog to work day 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 gross 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 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 (NICs). 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. In addition, the tax treatment of salary sacrifice, as well as other employee benefits such as pensions, has changed over the past few years. For up-to-date information, visit 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 individual needs. Such an approach, often referred to as ‘clean pay’ is easily communicated, understood and administered. However, on the downside, staff could:
- spend more money buying their own benefits than it would cost the firm to do so on their behalf
- spend work time searching for the best deals
- make poor decisions
- expect a particular benefit to be provided
- relinquish tax advantages in the case of certain tax-efficient benefits.
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 schemes (also known as ‘cafeteria benefits’ or ‘flex plans’) allow staff to vary their package to meet their personal requirements. The dividing line between pay and benefits is less rigid than in standard reward packages. In most schemes, employees are able either to retain their existing salary while varying the mix of various benefits they receive or adjust 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 arrangements. 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 the individualisation of reward, help address employee diversity, be cost-effective and assist in the harmonisation of reward practices, especially during a merger and acquisition.
In practice, both flexible and voluntary benefits schemes may be used by the same organisation. Employers that provide a ‘flex’ scheme to the workforce often also offer voluntary benefits.
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 a flexible or voluntary benefits scheme, it’s important that the choices, and the implications of those choices, are made clear to employees. If the options are too complicated, or the method of making choices is seen as difficult, then individuals may default to 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 benefit 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 HR and reward professionals to consider:
Why the organisation is introducing/offering the benefit. How does it support the organisation’s business goals? How does it reward the values and behaviours that the employer needs?
How the benefit fits into the HR and reward strategy. Does it support the people management and development practices that the company requires to be successful?
Will the change be valued by current and future employees? Have their views been researched?
How the benefit will be launched. Who are the key stakeholders and how will they be involved? Does the launch team have the required skills and knowledge?
The message. How will the organisation explain what is being introduced and why to staff and line managers? How will the organisation describe how the benefit works and what staff need to do? How will the benefit be communicated on an ongoing basis to existing and potential employees? How will the communications align with the requirement from April 2020 for employers to give new employees and workers a written statement of their terms and conditions which includes all remuneration, not just pay?
The flexibility of the implementation and communication plan to changes in the business context.
Do individuals have the right knowledge, skill and attitudes to make informed decisions and whether they need to foster financial awareness?
The factors that will be used to assess whether the benefit is successful in supporting the organisation’s goals. Which people and business measures and targets will be used on an ongoing basis to review its application?
Useful contacts and further reading
Books and reports
CRONER REWARD. Employee benefits report. Stone: Croner Reward.
PERKINS, S.J. and WHITE, G. (2016) Reward management: alternatives, consequences and contexts. 3rd 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.
EVERETT. C. (2016) Where next for benefits? Employee benefits special report. Human Resources. April. pp48-49.
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: 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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