Legal opinion: Incentivising staff in challenging economic conditions

Incentivising staff in these challenging economic times is more important than ever as employers look to increase productivity and get more “bang for their buck”. Similarly, the cost of recruitment often means that it is more cost-effective to retain existing staff who are performing well, rather than recruit new staff.

However, all of this is difficult to do when there is little money available for the pay rises that have traditionally been the most common way to incentivise staff, meaning that employers increasingly need to consider more creative solutions.

Additional holidays

Key points

Options for employers to incentivise staff without offering pay rises:

  • additional holiday – either paid or unpaid;
  • flexible benefits/salary-sacrifice schemes, such as pension contributions, cycle-to-work schemes and childcare vouchers;
  • bonus schemes that are self-funding;
  • HM Revenue & Customs approved share plans; and
  • proactive career management and performance review processes.

One option is to offer additional holidays. If there is little work available for employees this could be a useful way to incentivise them without incurring extra costs for the business, as staff would have to be paid if they were at work, even if there were no work available. Further, businesses looking to save costs could allow employees to buy additional holiday, in excess of their existing entitlement.

Flexible benefits

Another option is for employers to introduce a flexible benefits/salary-sacrifice scheme. If some benefits are already provided, employers could introduce additional benefits and allow employees to choose a certain number of the benefits on a list. The recent rise in national insurance contributions makes the benefits of salary-sacrifice arrangements even more attractive. Salary sacrifice allows employees to give up some of their pre-tax earnings in exchange for benefits such as pension contributions, cycle-to-work schemes and childcare vouchers. By paying for these benefits out of pre-tax salary, employees can reduce the amount of income tax they pay, and, at the same time, their employer can reduce its national insurance contributions, often passing on these savings to employees. A large number of companies have introduced salary-sacrifice schemes, providing both financial benefits and greater choice for employees, and staff satisfaction levels have risen as a result.

Bonus schemes

In many industries and workplaces, a great way to incentivise staff is to introduce a bonus scheme. Employers will need to consider carefully how the scheme will operate, so that by rewarding employees for producing or selling larger quantities, quality does not suffer. One way would be to include subjective as well as objective assessments of their performance, for example, linking their bonus to their performance reviews. The main advantage that this has over the other options is that the scheme can be largely self-funding: indeed, a significant increase in employees’ productivity could result in the employer paying less under the bonus scheme than the additional revenue that is generated.

Share plans

Companies should also consider using HM Revenue & Customs approved share plans. Many companies make the most of Save As You Earn schemes and Share Incentive Plans, which are tax-efficient, all-employee share plans. Such plans can fit with a corporate strategy of encouraging ownership of the company’s shares by employees at all levels, but in a tax-efficient manner.

Given the limited scope for salary increases in the current economic climate, it is vital that businesses explore the whole range of benefits and tax advantages available to them and their employees.

Finally, employers should remember the importance of incentivising employees by ensuring good management of them and their progression. A strong performance culture, coupled with opportunities for development and praise where it is due, go a long way to help retain staff and cost very little.

Michael Carter, partner and head of employee incentives, and Helen Ward, associate, Addleshaw Goddard LLP

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