Ask any group of employers what the term 'flexible benefits' means and each one is likely to come up...
Ask any group of employers what the term 'flexible benefits' means and each one is likely to come up with a different interpretation. What is more, they are all liable to be correct.
The beauty of flexible benefits (or flex) schemes is their ability to match the employee benefit needs and budget of individual employers. The real bonus is that each scheme will be designed to offer at individual employee level the amount of benefit choice the employer is comfortable with for its workforce.
Flexible benefit schemes started in the US in the 1970s and have gradually been making their way into the UK. In a recent survey conducted among 250 companies by Towers Perrin, 21% already operate a flex scheme while a further 40% were planning to do so.
Increasing interest
Current estimates are that over 150 such schemes are now in operation in the UK. There is little doubt that interest in these schemes is on the increase. Nor is this interest restricted to large employers. The traditional barriers preventing medium-sized companies thinking of flex - such as buying power, administration system, communication tools and economies of scale - are being overcome by innovative product design, new technology and plain common sense.
In a 1998 survey of 12,000 companies conducted by PricewaterhouseCoopers, 67% of respondents were small to medium-sized employers (companies with fewer than 500 employees) that were actively considering flexible benefits.
Why the increased interest? In one word - change. It is the one thing all companies can predict with any certainty in the current competitive climate. Some 68% of respondents in the survey believed that the introduction of flexible benefits would help them overcome the challenges change would undoubtedly bring.
This takes us to the real advantage of flex schemes - their ability to support and promote the introduction of change within an organisation. For employers, the challenge in doing so is multifaceted and needs to address:
l Recognition and communication of the real drivers for change.
l The extent of change envisioned.
l Identification of the company culture the change must support.
l The extent of paternalism to be retained.
l The extent of empowerment and choice to be given to the workforce.
l Any cost constraints.
At the heart of any flex scheme is the same basic principle - giving employees some choice in the way they are rewarded. This principle recognises that each employee has different needs and that these needs will vary over time as the employee's personal circumstances change. Developing a benefit package that can be tailored to meet those changing needs is the real challenge considering the different life stages a person can go through.
Differing needs
Can any one benefit structure be suitable for all employees? At each stage employees need different types of benefits to suit their needs. For example, as soon as marriage or parenthood occurs new benefits will be needed to support dependants if the main breadwinner suffers an illness or accident.
This makes it important for employees to be able to change benefits to match their changing circumstances. Those nearing retirement and with grown children, for example, may want fewer holidays and less life cover in favour of more pension contribution. Building in the flexibility to change benefits when major lifestyle events occur can be an attractive feature.
The Government's continued push to make people more self-sufficient throughout life also needs to be considered. Reducing dependency on the State encourages people to take control of their own financial planning and security. A more financially-literate society bodes well for all benefits packages, but mostly for those giving employees a degree of choice.
For employees, the key advantages of choosing their own benefits include:
l Minimising benefits that are unvalued and irrelevant in their eyes.
l Being able to change benefits to match changes in their personal circumstances (for example, marriage or birth of a child).
l Being involved in the choice process helps appreciation and understanding of the benefits package.
Providing choice
Why give employees choice? Employers know that employee benefits can be an expensive part of the wage bill. Yet employees seldom give it a thought and rarely appreciate the spending involved. Flex can change this.
With companies increasingly encouraging their staff to become more self-sufficient in dealing with customers, making them responsible for their own decisions and allowing them to develop entrepreneurial skills, the next logical step is to extend this concept into the employee benefits package itself.
By allowing employees to choose the benefits that are of most value to them, they can be encouraged to take responsibility for their total compensation package and will really appreciate and value their employee benefits package. How much choice is offered and how quickly a company can move to this stage will depend on how committed they are to moving to where they want to be.
Company culture will also be an important influence. This is borne out by the US experience which underpins culture as the real driver and influence in introducing flexible benefits. Why should this be the case? In identifying the company culture, human resource managers will have decided the image the company wants to portray. The real challenge is then to produce a reward package for staff that will encourage the behaviour they will need to demonstrate to deliver that image.
The advice of a benefit consultant is central to the development of a flexible benefits scheme that will help achieve the client's desired corporate culture and human resource goals. Advisers have an important role to play in explaining the value of this approach, the relative cost to the employer and in obtaining buy-in from senior manager down to shop floor.
Communication of a flexible benefits scheme before, during and after implementation is crucial to ensure its success, as is testing the package design at every step of the way. From fully researching the employee benefit needs from both the employer and employee perspective, identifying the perceived value of the current benefit package and identifying the company goals for the future, advisers will be able to highlight any benefit gaps and to shape a package that will help the company achieve its goals.
Successful implementation will bring advantages for the advisers as well as the employers and employees. Having demonstrated their added value to their client, advisers will have built a relationship with their client that can be developed into the future.
What changes can we see?
When flex was in its infancy in the UK in the early 1990s, an element of benefit choice was more likely to be given to senior managers only. Human resource managers have recognised the need to establish a reward system that will help motivate not only their managers but also their workforce to deliver the company goals. As a result, benefit choice is now being extended to a wider audience - in many schemes to the whole workforce - although the base point from which the choice will be made can still differ from category to category.
At times the choices taken by employees in certain industry sectors do surprise employers. The value of a better car and more sports facilities can outrun the value of more traditional employee benefits.
Changes have also appeared in the range of benefits now offered within flex schemes. Although the traditional protection benefits - life cover and income protection - still form part of most flexible benefit schemes, healthcare and cover against disability and accident have also been included with pensions, cars and holidays. In recent years, many newer benefits have appeared on the scene or have some more innovative benefits in recognition of the fact that home life pressures can impact on working life performance.
Care needed
Advisers need to take care in selecting providers. Poor service, such as late delivery of a car, poor claims service or limited outlets to redeem vouchers, can tarnish a scheme and undo all the effort put in to create and launch the flexible benefits scheme. Benefits will differ from scheme to scheme, so involvement of staff representatives when testing benefits is essential. To scrimp at this stage is to risk undermining the overall success of the flex scheme when it is launched.
Within any flex scheme, employees will control part of the benefit spend and be able to choose the level of benefits most suitable to them, with any balance of the spend being payable as remuneration. The employer will have agreed the range of benefits on offer, including any 'core' benefits, and may also allow employees to voluntarily pay more to upgrade benefits to an overall maximum spend. These could allow employees to either top-up existing benefits or choose new types of benefits.
There have recently been some interesting studies into the practical experiences of employers and IFAs that have set up flex schemes. They have found that setting up a flex package should be part of a cohesive HR strategy to support business goals, not set up for its own sake. A company's attitude to its staff will help determine if a flex scheme can succeed. Neither the company nor its employees will get value from a flex scheme if empowerment and trust in staff are not obvious.
The PricewaterhouseCoopers survey found only 1% of companies predicted no change over the next 10 years. More interestingly, the changes envisaged were more flexible working practices and increased accountability among staff. The obvious implication is that people will take more control of their own achievement, development and reward. Almost 70% believed that flexible benefits would help overcome the challenges change brings.
Most change is forced on companies. New industry entrants, like Virgin or Direct Line, can exert a lot of pressure on an industry to change. A skills shortage, for example, can put pressure on an industry and push salaries up. However, some companies may find the higher cost this brings unpalatable, especially if profit margins are already tight. What they are looking for is better 'value' from their spend. This is exactly what a flex scheme is designed to achieve.
A flex scheme, as with any type of employee benefits package, should exclusively focus on the value that can be achieved from the available budget spend. This is done by choosing the right benefits, communicating them properly and reviewing their effectiveness against quantified targets regularly.
Sue Sneddon is technical support manager at Guardian Employee Benefits
