What are employee benefits? Source: CIPD
Employee benefits are non-cash provisions within the reward package, although they have a financial value and cost for employers, for example paid holidays, pensions and 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 play a role in the development and shaping of benefit policies and practices. For example, in the US, the lack of well-developed public health and welfare infrastructures, together with generous tax concessions in relation to staff benefits, have helped drive a wide array of benefits provisions such as healthcare.
Employee benefits generally form a significant part of the overall reward package, with estimates suggesting that their value can account for up to around 40% of the costs to organisations of employing staff.
A brief history of employee benefits
Traditionally, employers provided employee benefits to retain staff (after pay had attracted them in the first place) or because they felt a moral obligation towards their workers.
In the earliest days of UK benefit provision, some companies offered benefits to workers 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 just 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 flexi-time) 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.
One employer concern is whether their employees are in a position to adjust to the new benefit landscape where they shoulder more of the risk (and reward). There is a belief that if employers give individuals more freedom and choice they also have a moral duty to help educate them about the possible consequences of their benefit choices and help them make well-informed decisions around what level of savings or health coverage they will need throughout their employment. Employers considering the business case should see our Workplace financial education report
Types of benefits
The main benefits employers offer include paid holidays and time off work, pensions, healthcare and risk benefits, and company cars and car allowances.
One of the more expensive parts of the employee benefits package, workplace pensions are currently at the centre of major change across both the private and public sectors.
Healthcare and risk benefits
These benefits may be provided to ensure both the welfare and productivity of employees. Common types of benefits include:
- occupational sick pay
- private medical insurance
- life assurance
- permanent health insurance
- critical illness insurance
- employee assistance plans
- dental insurance.
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 childcare benefits (such as on-site nurseries), concierge services, free or subsidised staff canteens and gym membership. Get more information on all aspects of reward from our Reward management survey.
Taxation and salary sacrifice provisions
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. For more information, visit the HMRC website (see Useful contacts).
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.
Voluntary and flexible benefits
Employers may offer access to a voluntary benefits plan, where staff have the opportunity to purchase third-party goods and services at a discounted rate from their post-tax income. The use of such schemes is often used to complement an employer’s paid benefits provision.
By contrast, a flexible benefit scheme gives employees a choice over the mix of cash and benefits they receive from their employer. Unlike voluntary schemes, benefits under a flexible scheme are paid for by the organisation.
Strategy and implementation
Before organisations introduce, or revise, benefit provisions, it’s important 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 fit sinto 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 employees? Have their views been researched?
- Launching the benefit. 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 explain 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?
- The flexibility of the implementation and communication plan to changes in the business environment.
- The factors that will be used to assess whether the benefit is successful in supporting the organisation’s goals. What measures and targets will be used on an ongoing basis to review its application?
For more information about the impact of benefits, see our Reward management 2013: supplement on aligning strategy and benefits.
The design and content of employee benefits should support an organisation’s business goals by helping attract and recruit employees and encourage the right behaviours, achievements, values and skills. Organisations need to examine what their existing and future employees need and want from their benefits and how best they can meet these preferences. Once in place, employers should communicate on an ongoing basis what benefits are on offer and why, so that employees are aware of these and can appreciate and value them. Additionally, they should consider whether employees have the right knowledge, skill and attitudes to make informed decisions and whether they need to foster financial awareness. It’s also important to establish targets and measures against which to assess how well each benefit is supporting its aims and objectives so that any necessary adjustments can be made.
Books and reports
CRONER REWARD. (2014) Employee benefits report 2014/2015. 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.
Visit the CIPD Store to see all our priced publications currently in print.
BETTELLEY, C. (2015) Securing the right benefits. Employee Benefits. February. pp14-17.
GREEN, J. (2013) The dangers of removing staff perks. Employers’ Law. October. pp14-5.
LOVEWELL-TUCK, D. (2014) How to stand out from the crowd. Employee Benefits. December. pp16-17,19-20.
PATON, N. (2016) A new age of options: how can benefits professionals create an attractive strategy for different employee age ranges? Employee Benefits (supplement). April. pp8-10.
TARAS, V. (2012) Direct versus indirect compensation: balancing value and cost in total compensation.Compensation and Benefits Review. Vol 44, No 1, January/February. pp24-28.
THOMAS, O. (2013/14) Building on a solid foundation. Workplace Savings and Benefits. December/January. pp30,32.