Part of the package

Alongside recent changes to work-based pension schemes, employee benefits have also been going through a period of evolution. Employers are beginning to recognise the importance of benefits and are making more of an effort to ensure they are valued by staff.

As benefits are somewhat ingrained in the UK employment culture, it can be useful for employers to ask themselves: why commit resources to providing benefits instead of simply paying equivalently higher wages?

As Mercer HR Consulting principal Philip Hutchinson rightly points out, very few people would go to work if they were not paid or rewarded in some way. Despite this, he says, benefits and pay rates only rank as the fourth most important working condition to employees, below matters like the boss, the working environment and recognition.

Hutchinson says although pay and benefits are usually discussed at a job interview and are an important part of the recruitment process, once a worker has been hired, they tend to be unappreciated, unless there are changes proposed or the employee is involved in choosing their benefits.

He hypothesises: “You probably can’t tell me exactly how much money you have got in your pocket, but if somebody stole it off you, you would tell me to the nearest penny what was there.”

He says it is a similar situation in employee benefits, because an organisation can be led to believe there is nothing wrong with the benefits offered because nobody is complaining about them.

Hutchinson says: “As soon as you touch a rewards package it is essentially the end of the world; the riot begins. It is strange thing, money and reward. It is something we take for granted but as soon as somebody mucks about with it, we get really upset.”

Hutchinson also points out that a benefits package is more appealing than a great big wad of cash.

“If I was to offer you £1000 you probably would not think of it piled on a table. You would think ‘I can pay off my credit cards’ or ‘I can go on holiday’.

“Benefits have a much higher perceived value than cash. So if you are an organisation trying to compete for talent in the market place the best thing to do is put your money into benefits because you get higher returns financially as well as in terms of staff recognition.”

An employer who goes to the effort of providing a benefits package for staff needs to know they appreciate the value of it, and consider it part of their remuneration. Alas, many companies find staff are unaware of the full range of benefits and do not always grant the employer the thanks and recognition they deserve.

Hutchinson says organisations need to make it clear to staff how much the company spends on them, not only in terms of the actual cost of the benefit, but also taking into account how much the benefit is worth.

He explains: “If your company spends £14 a year on life insurance for you, you are probably only going to be fairly interested. But if I said to you that in the event of your death a relative would get four times your salary, all of a sudden that is serious money and you take immediate interest.”

Hewitt Associates’ reward consultant Darren Smith says the problem with em-ployee benefits is staff do not value them unless they are actually using them.

He expands: “For example private medical insurance and pensions are some-thing that you are only going to use when you retire or if you run into a problem medically. It is not something that gets recognised unless you actually have to use it. You don’t become aware of it until that point.”

Scottish Widows’ corporate pensions head of marketing Jim McCaffrey agrees. He says it is a difficult area and most research would conclude employees generally do not understand the value of the benefits package which their employer has put in place for them.

Education, it seems, is paramount to ensuring employees are aware of, and appreciate the benefits on offer.

McCaffrey says: “This should be personalised and targeted to the specific needs of a company rather than simply relying on generic information. It should also focus strongly on the benefits, [both financially and in terms of convenience] of taking advantage of and participating in the scheme.

“Total reward statements can be a very effective communication tool in this area because essentially they make the benefits more tangible to the workforce.”

Barnett Waddingham Investments’ director Clive Grimley also believes total reward statements are a key tool in recruitment and retention.

He says: “Employee benefits are not fully understood by employees. They need to see the whole package – not just the headline story, and therefore a total reward statement is key for recruitment and retention.”

Hutchinson stresses the importance of communication in getting value out of employee benefits.

He says: “The main problem we have in the UK – as in other countries – is apathy. It is well and good telling people things but they often just do not want to listen. The challenge employers have in getting round this apathy is to find ways of getting people to take notice.

“The communication side is probably the most important thing you have got when it comes to employee benefits because you have to engage people, they have to listen to you, and having listened to you they have to come away and think: ‘Wow, that’s great!’”

Smith agrees the importance of communication cannot be stressed enough.

He says: “What we find with a lot of employers is that employees are not even aware of a lot of the benefits available to them. When consulting clients we ask employees to recall how many benefits are provided by the employer. It is amazing how many benefits employees are not even aware of.”

Clearly communication is very important when it comes to employee benefits, not only in educating them about what is available and making it easy for them to take advantage of them.

Smith says: “The importance of communication between management and workers is vital, particularly when you are moving from a DB to a DC plan, when there are often a lot of suspicions.”

Hutchinson says there have been significant developments in the way management can communicate with staff. He says using “segmentation” to send targeted information to suit individual employees, can be very effective and is relatively easy to do.

He explains: “If I was young, free and single I probably won’t want to be told ‘you must save for your retirement now’, because I’m trying to spend all my money on beer. The lifestyle factors that drive you when you are young are completely different to the ones that drive you when you’re older.

“Segmentation recognises there are different groups in organisations and it allows managers to communicate with them in different ways.

“If that young person goes into a company website about benefits, they will be able to see everything, but the things that will be brought to the front are those we know that age group are interested in, such as subsidised gym membership.”

Hutchinson says employers should make the effort to understand their employees, and appreciate not everyone is at the same place in their life. He says demographic profiling is a valuable exercise as it shows the employee that the employer is making an effort to understand them and their needs.

Hutchinson adds: “You do not want to go in and start talking to employees about salary sacrifice benefits when they do not have the money and it would be unsuitable for them to buy into that.”

He also makes the point that communication is not always about using technology, and quite often it can be more effective to use the old fashioned method of ink on paper.

Hutchinson says: “A white envelope with ‘private and confidential’ written on it is a common indication that it holds either a P45 or a pay rise. It carries more importance than an e-mail and commands people’s attention.

“We can get carried away with technology so every now and then it doesn’t do any harm to go back to the good old-fashioned ways of communicating.”

The growing attraction of flex
As employers make the switch from DB to DC pension schemes, there has been an increased interest in flexible benefits.
Flexible benefits, or “flex”, is a formalised system that allows employees to vary their pay and benefits package. In effect, it is a way of handing over of the reins to staff so they can manipulate their benefits in a way that suits individual needs.

Flex differs from voluntary employee benefits, which are simply bulk discounts organised by employers with external providers.

In this scenario the employer merely acts as an effective gatekeeper to discounts – the cost still comes entirely out of employees’ pockets – but under a true flexible benefits scheme the divide between pay and benefits can often become a grey area.

Most schemes contain a core of benefits – holiday entitlement, life assurance, private medical insurance and the like – while many can include any number of peripheral rewards from bicycles, childcare vouchers and dental insurance, to retail vouchers and even pet insurance.

In a flex scheme an employee can choose where benefit funds are directed, giving them the power to spend an assigned pot of money on benefits which best suit their personal requirements, thereby optimising the value of their benefits provision.

Grimley says the rise of flex is proof firms can no longer take a one-solution-fits-all approach to employee benefits now they have witnessed the demise of the job-for-life culture.

He says: “People’s expectations have also changed and therefore, employers must adjust and provide different offerings to meet those needs, bringing employee benefits into the forefront of recruitment and retention.”

Smith agrees employee benefits have become more important over the past few years.

He says: “Employers do not just offer benefits for the sake of it anymore, it is more to do with the business objective and improving the ultimate engagement of the employees with in the organisation.

“The days of saying here is a suite of benefits, if you don’t use them you don’t actually get any advantage, are gone.”

McCaffrey says recent changes to the benefits system have been brought about by increased affordability, as well as changing employee demand.

He says: “Flexible benefit packages used to be the preserve of the large FTSE250 organisations. Developments in technology, product innovation and falling costs have enabled small to medium-sized companies to benefit from these propositions too.

“There is also growing competition among employers for skilled labour and they are increasingly recognising the importance of putting together a competitive benefits package to attract the best talent.”

The role of pensions in total reward
There has been an increasing focus on employee benefits in recent times, because, as Hutchinson suggests, it is the “last bastion of productivity”. There has been a lot of research done about how people work, and the last area to be looked at in depth is benefits.

Hutchinson asks: “How do employers get someone to go that extra mile? This is where the role of employee benefits is changing. In conjunction with reward it is being used to get that last ounce of blood out of the workforce.

“What it means is there needs to be smarter management of employee benefits. You have got to be smart to make sure that you are not spending any more money than you were under the old fixed benefits/final salary pensions schemes.”

Although there has been an increased emphasis placed on less traditional benefits, pensions still form a vital part of any package. Hutchinson says the way pensions are used by employers is changing. He says many companies only offer them because employees expect them to be available.

He explains: “Pensions are still important because if you do not offer a pension scheme then you are not perceived as a good company to work for.

“For most people their major retirement fund is going to be property. They are looking for a pension just to top that up, but it is still an important benefit.”

McCaffrey also says pensions would still sit at the heart of any package and be considered a core benefit.

He says: “This is partly because the public is becoming increasingly aware of the importance of private pension provision and not simply relying solely on the state.

“In addition, pensions offer important tax and fiscal benefits to employers and employees alike, particularly if established as part of a salary-sacrifice arrangement.”

Grimley also says the tax benefits associated with pensions will keep employers and employees interested for some time to come.

He explains: “Barnett Waddingham Investments’ view is that post A-Day pensions should be viewed more as a tax-planning vehicle. They are one of the few long-term saving plans that are tax advantageous. But the problem is they are surrounded by mystique and fear. A total reward statement can help to demystify them and ensure the employer gets kudos by providing high-level contributions.”

The general shift in focus on the pensions arena has placed a greater emphasis on employers to make other benefits available. Grimley says the move to DC schemes has encouraged members to get involved in their investment and has prompted greater engagement with the entire employee benefits package.

He says: “Traditionally, defined benefit members had no requirement to engage with their pension arrangements; instead it was a done deal with minimal need for involvement from the member.

“The switch to DC means more involvement from the scheme member, which when combined with reducing state provision, results in employees realising they need to take personal responsibility.”

Smith says the removal of DB schemes has unsettled some employees and it is important for organisations to offer them a replacement package that matches the previous one.

He explains: “By taking away DB plans the challenge has become about the total reward package. It is important to still try to convince employees they are able to get the same value out of the total benefits package which is offered to them.

“I think the ability of being able to get employees to think in terms of the total reward package as opposed to ‘there goes our defined benefit scheme...’ is important. A lot of businesses use flexible benefits, not to necessarily sweeten, but to at least try and show employees they are not actually losing out through the introduction of a DC scheme.”

McCaffrey points out the move away from DB schemes is not the only force at play when it comes to benefits.

He says: “The recent introduction of age discrimination regulations and the potential impact of the government’s pension reform agenda [particularly the introduction of personal accounts] are forcing employers to consider their employee benefits packages very carefully.

“These provide strong incentives for change in addition to the wider demographic changes which are affecting the shape of the workforce.”

It is easy to focus on the employee when talking about benefits, but there must be something in it for the employer as well, or why would they bother going to the effort and expense?

Obviously, one of the key reasons benefits are offered is to help recruit and retain staff.

Hutchinson makes a valid point when he says: “The perception is if an employer does not offer a pension scheme then they are a bit suspect”.

Benefits are also a powerful pulling point when prospective employees are considering a job offer. Hutchinson says benefits like insurance and childcare vouchers have a higher perceived value than a slightly increased rate of pay.

He explains: “I go to work to earn money to fuel my lifestyle. If there is no lifestyle, what is the point of going to work? If a company offers me a range of benefits to which I think, ‘brilliant that really suits my lifestyle’, I am more likely to go there rather than to an organisation that might offer a couple of pounds more but no benefits.”

Grimley agrees remuneration is about more than just money.

He says: “To be able to deliver a diverse and relevant remuneration package to a wide range of employees. Salary is not always enough.”

Benefits also help reinforce the working environment the employer is trying to create and thus improve staff retention.
Smith says: “If company is trying to improve the bond between itself and its employees, the more it can do to make employees feel part of the organisation, the less likely they are going to want to leave.

“I am not saying benefits are going to make somebody stay at a company, but it at least improves their ‘stickiness’ to the organisation.”

Hutchinson emphasises how benefits also help engage the employee within the business, helping them to feel part of it, rather than an unappreciated faceless worker trudging in every day.

He says: “If you improve employee engagement there is a direct link in improving profitability and sales. Employee benefits increase the level of engagement with the workforce. They also offer a way of changing or creating a culture.”

However McCaffrey warns employers to think carefully about what their objectives are before setting up or changing an existing benefits package.

He says: “Each employer will have their own reasons but typically these centre around staff recruitment and retention, employee engagement and advocacy, and a desire by the employer to control costs and manage risk/volatility more effectively.

“They should also agree the key performance indicators in advance so they can clearly measure whether they have achieved their objectives.”