Where did the idea of flexible benefits come from? And other frequently asked questions

Traditionally employee benefits have been fixed and non-negotiable. However,
times have changed

There is a long history of companies offering extra benefits to their
employees in exchange for a portion of their salary. Manufacturers have offered
employees the chance to buy their company’s products at a reduced rate for
hundreds of years.

More recent developments include the opportunity to vary pension
contributions, or to put money into company share schemes.

However, over the past five years or so, the concept has evolved beyond
these simple beginnings to offer employees a far wider choice and greater
personalisation of their benefits.

The ‘home’ of flexible benefits is the US, where the concept is strongly
established. With a limited national health service, medical insurance is the
responsibility of the individual, and is a key consideration in the overall
benefits package an employee receives.

There are numerous instances of healthcare organisations to choose from and
US organisations tend to provide employees with a degree of choice in
healthcare provider. As such, the US HR function has been built on the need to
offer a wider choice to employees. This made the transition for offering more
choice with other benefits such as company cars and sports club membership
easier.

1. Why choose flexible benefits in the UK?

For most businesses, employees represent the lifeblood of the organisation.

Finding and retaining high quality staff can be the difference between
market leadership or business failure. A satisfied workforce leads to higher
morale and greater productivity.

Organisations known for a progressive approach towards employment have
greater ability to attract the type of employees they want and need to run
their businesses effectively.

One way for companies to attract and retain high quality employees is to
provide them with a flexible benefits package, giving them scope to make their
own decisions about the composition of their remuneration package.

2. Why don’t we all have flexible benefits then?

The nature of this approach to employee benefits means there is usually
heavy administration involved. In the UK, without the driver of medical
insurance, while many companies would like to offer their employees a greater
degree of choice in the benefits they receive, the costs involved have been
prohibitive.

A number of schemes started in the UK in the 1990s have been scaled back or
stopped altogether. Research conducted in the UK by RebusHR showed that
interest remained strong, but there were strong reservations about the
paperwork involved.

3. What has changed recently to solve this?

Since the 1990s, technology has strongly advanced, especially with
development of wider networks and the internet, and growth in e-HR and
self-service applications. Companies like RebusHR, working with Microsoft and
others, have developed new applications that reduce administrative needs. As a
result, many organisations are rethinking their attitude towards flexible
benefits.

4. How do such schemes work?

A flexible benefits scheme enables an organisation to offer its employees
greater choice in the composition of their salary packages. Rather than giving
employees a specified salary and set additional benefits that can either be
taken or left, the fundamental concept is that an employee is given a package
value and is able to select their benefits within pre-defined limits.

These schemes cover a broad range of benefits from traditional items such as
company cars, healthcare and pension contributions, to leisure club membership,
retail vouchers and even free fruit. An organisation may also extend its scheme
to provide flexibility in terms of holiday entitlement, allowing employees to
exchange annual leave for other items within the flexible benefits scheme.

5. What are the key business benefits?

There are several business reasons that might contribute towards an
organisation’s decision to begin a flexible benefits scheme, ranging from
attraction and retention of employees to government legislation.

For example, a company that has been involved in merger or acquisition
activity may have a diverse range of packages for staff undertaking similar
roles. It may require considerable flexibility to accommodate valuable staff
that had agreed a favourable package while employed by the merged or acquired
company.

Similar pressures apply when a company begins to operate in new territories
where the workforce has different demands to its domestic staff. Tax
efficiencies may also vary between regions.

If organisations have the flexibility to adapt to different legislative
environments, they can pass tax efficiencies on to employees.

Another important consideration is lifestyle changes. Younger employees may
be more inclined to trade in holidays for a higher salary, whereas older
employees may be more concerned about the level of their pension contributions.

Organisations also tend to be able to attract discounted rates for items
covered within a benefits scheme. So, for example, employees would benefit by
choosing sports club membership at a discounted rate within the flexible
benefits scheme rather than taking the value in the form of a higher salary and
then joining the same sports club at the full rate. Similar employee benefits
arise where a company can offer a not-for-profit service, such as a crèche or
company loan, within a flexible benefits package.

There is also legislative pressure – companies being asked to provide better
work-life balance options (for example childcare) can build this into the
overall package.

6. Who can benefit from flexible benefits?

Market research by RebusHR reveals a growing awareness of, and interest in,
flexible benefits among large organisations. The first customers for the new
application are likely to be existing clients that have already expressed an
interest in flexible benefits. The company also has plans to introduce flexible
benefits for its own employees using the new application.

"A scheme of this scope tends to be more suitable for medium to large
organisations, those with 500 or more employees," says Kevin Shepherd,
senior product planning manager at RebusHR.

He adds: "We expect the flexible benefits application to be
particularly popular among dynamic and ‘culture conscious’ companies which
pride themselves on providing a flexible and rewarding working
environment."

Eight key business drivers for introduction of flexible benefits

– Attraction and retention of staff

– Globalisation

– Mergers and acquisitions

– Tax efficiencies

– Group rates

– Reduced third party costs

– Not-for-profit service

– Government legislation/pressure

Flexible benefits research

The research gives an insight into
current experiences of using flexible benefits schemes, perceived advantages
and disadvantages, and future plans. The findings are based on an independent
survey involving 156 telephone interviews with senior HR managers, sponsored by
RebusHR, carried out by Sandheys Consulting during 2002. All of the
organisations involved employ more than 500 people and represent a cross-section
of industry sectors.

Key
findings

– The number of organisations with a flexible benefits scheme
or planning to introduce one has doubled in the past two years

– Flexible benefits are seen as a weapon in the battle to
recruit and retain high-quality staff

– The growing popularity of flexible benefits reflects the
concern of HR with work-life balance issues

– The main opposition to schemes is around the amount of
administration workload anticipated and the challenges involved in
communicating the changes to employees

– There have been problems with the accuracy of data and
integration with the other information systems within organisations

1. Why organisations introduce
flexible benefits

25 per cent of the organisations interviewed either already
have or plan to implement a flexible benefits system within the next 12 months.
No organisations have any doubt about the advantages of having a scheme

100 per cent of firms with a scheme said it is beneficial
because it allows staff to vary or choose benefits to suit their lifestyle
requirements

100 per cent agreed it helped or would help with recruitment,
motivation and retention of staff. A small number also thought a scheme is a
useful incentive in mergers for harmonising benefits, for negotiating better
deals with benefits suppliers, and as an example of innovative thinking in HR

Even among those organisations with no plans for introducing
flexible benefits, there is little uncertainty about what could be gained:

89 per cent believed a scheme would help staff to choose
benefits to suit their lifestyle requirements

87 per cent acknowledge it would help with recruitment,
motivation and retention

What they said:

"To attract, motivate and retain staff: these were our
main objectives. We had benefits available, we just had to change them into a
flexible benefits scheme."
HR manager, financial services company

"It acknowledges that people are
individuals and not cattle."
HR manager, management consultancy

"Flexible benefits helps in a
situation where an employee has a problem and perhaps needs extra time off, or
they have a debt problem and need advice. It allows a difficult situation to be
taken care of by the employee with the help of the employer."
HR manager, local authority

"It opens up the range of
benefits to more staff and removes the grade or status factor from benefits."
HR manager, leisure services company

2. Reasons for saying ‘no’ to
flexible benefits

Many companies aren’t ready to make the change. The five main
reasons given were:

– Current levels of benefits are considered acceptable

– Company culture is not appropriate for such a scheme

– Introduction and administration costs would be too expensive

– It has never been considered

– Lack of manpower resources

The responses reveal a cautious
approach, where organisations appear not to believe it is worth overcoming
known challenges to reach the potentially large, but more unknown, rewards for
the business as a whole.

What they said:

"It may not fit with the company philosophy, and there is
the burden of flexible benefits administration."
HR manager, financial services company

"We are heavily trade unionised
so we have to be careful. We need to do it in conjunction with them, and it is
something we are looking at. Unions, so far, are positive in their attitudes to
it."
HR manager, manufacturing company

3. The challenges of administration

None of the respondents expect it to
be easy. Few organisations are able to introduce a wide-ranging new scheme
integrated with existing systems without overcoming some complex challenges,
both technical and human.

Asked about the difficulties they had
faced or expected to face:

43 per cent of interviewees pointed to the additional workload
and administration caused

37 per cent were concerned about communicating changes to
employees

28 per cent with deciding which benefits to offer and
calculating their value

28 per cent with the need to upgrade information systems and
merge different employee databases

26 per cent had struggled with, or expected to struggle with,
getting the right information in place to administer and maintain the system

23 per cent with training the workforce to use the systems and
refer to them in annual reviews

18 per cent with the time and costs of setting up a scheme

9 per cent with the basic complexity of the scheme and 5 per
cent with measuring the perceived benefits, finding a supplier/outsourcer to
handle the scheme, and the possible mixed reception from managers and workers

9 per cent said they had not experienced, or did not expect to
experience any real difficulties.

What they said:

"It’s very challenging to administer two different car and
pension schemes."
HR manager, accountancy firm

"Flexible holidays were fine,
but childcare vouchers threw up tax problems – a minefield on tax and NI
contributions."
HR manager, banking sector company

4. What benefits – and which are
the biggest challenge to introduce?

The following are currently the most
commonly offered benefits, or are benefits that organisations are planning to
offer:

Benefit                                                            %

Private medical insurance                                  90
Holidays                                                           83

Life assurance                                                   83
Pension scheme                                                75
Health screening                                               63
Dental insurance                                               63
Critical illness insurance                                     63
Permanent health insurance                               63
Company cars                                                  60
Pensions (additional voluntary contributions)      60
Personal accident insurance                               58
Childcare vouchers/allowance                           55
Leisure club membership                                   50
Travel insurance                                                45
Dependant’s pension on death in service            45
Financial counselling                                          40
Training and development allowance                 30
Retail vouchers                                                 28
Private car leasing                                             25
Health cash benefits                                          20
Legal expenses insurance                                  10

Benefits most likely to be added to
existing schemes in the future are retail vouchers, childcare
vouchers/allowance, financial counselling, health cash benefits, legal expenses
insurance and travel insurance.

Administration workloads appear not to be a serious
consideration in terms of which benefits are offered. There is no relationship
between the difficulty in administering particular benefits and their
popularity. Benefits which cause the most headaches are thought to be: company
cars, holidays, leisure club membership, training and development allowance,
childcare vouchers/allowance, pension schemes, AVCs, financial counselling and
retail vouchers.

The least problematic were considered to be: personal accident
insurance, private car leasing, health cash benefits and dental insurance.

What they said:

"We have outsourced it to save on administration – they
are the experts. We can exchange data in standard format and service is pretty
good. Annual enrolment by employee is done personally via our company intranet
site to the provider direct."
HR manager, financial services company

"It’s early days, and we are
doing it slowly. The providers have not always offered what they said they
would, leaving members of staff saying ‘I told you so, it doesn’t work.’"
HR manager, building society

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