Guide to employee benefits

Employee benefits offer a way to attract and keep people, contribute towards improving wellbeing and encourage required behaviours, achievements, values and skills. This guide looks at:

• What employee benefits are
• How to introduce employee benefits
• Benefits you can consider for your employees

What employee benefits are

Employee benefits are non-cash provisions within the reward package, although they can have a financial cost for employers, for example paid holidays, pensions or 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’ wellbeing (and, in so doing, potentially enhance employee engagement). The prevailing financial, legal and social background also plays a role in the development and shaping of benefit policies and practices.

From Chartered Institute of Personnel and Development (CIPD) research the most common business reason for providing employee benefits is to attract, recruit and retain staff to support current organisation needs. The most common external drivers influencing benefit provision are legal and employment obligations.

Recent developments:

Some employers have adopted a more individualistic approach to employee reward with some movement from fixed to flexible voluntary benefits. Employee benefits are no longer seen as just a retention tool as research has found that what can make an organisation more attractive depends on an employee’s individual circumstances, such as being a carer. This has generated the concept of ‘total reward’ where organisations implement a bundle of mutually supporting financial and non-financial rewards such as flexible working, that align to the needs of the organisation and its employees.

The pandemic has increased internal and external pressure on employers to review the suitability of their healthcare benefits, for example occupational sick pay, as well as their overall financial and mental support for staff.

Introducing & implementing benefits

• Before introducing, revising or removing a benefit, its important for the organisation to ask:
• Why do we want to introduce/offer this benefit? How does it support our organisation goals? How does it reward values and behaviours?
• How does the benefit fit into our people and reward strategies? Does it support our people management and development practices?
• Will the change be valued by current and future employees? Have their views been obtained?
• How will the benefit be launched? Who are the key stakeholders and how will they be involved?
• What is the communication plan to explain the change to line managers? How will the benefit/change be explained to staff including any action they need to take?
• How flexible are the implementation and communication plans to any changes in the organisation context?
• Do employees have the knowledge, skill and attitudes needed to make informed decisions? Is there a need to invest in financial awareness?
• How will you assess the impact of the benefit is supporting the organisation goals?

What benefits could you consider for your employees

The options you will be able to offer may well be influenced by what the organisation can afford. Below are examples of benefits you need to provide and others you could consider.

Pension

These are widespread due to legal requirements and are one of the more costly elements of a benefit package. See our Guide to employer legal obligations on pensions for more information.

Holidays and time off

Employers are required by law to offer certain levels of paid annual leave, with many offering, more than the minimum required. Some also have schemes where employees can either buy more leave or sell leave back to the organisation.

There are also statutory entitlements to other types of time off work including adoption, maternity, paternity, parental and bereavement leave. As with annual leave many organisations offer more generous time off arrangements above those required by law.

Examples of other time off:

• Special paid leave
• Career breaks
• Jury service

Healthcare

• Occupational sick pay
• Employee Assistance Programme
• Health Cash plans
• Eye care vouchers
• Cycle to Work
• Access to onsite gym, discounted gym membership
• Death in service

Examples of other financial benefits

• Interest free loans for example public transport annual season pass/card
• Discounts on services/products
• Subsidised canteen
• Childcare support – voucher scheme?
• Salary advance schemes

Other non-financial benefits

• Flexible Working
• Learning & Development Opportunities
• Secondments

Taxation and salary sacrifice

Certain employee benefits attract preferential tax treatment, which is often inline with government policy to encourage or support certain choices, for example, with pensions, cycle-to-work schemes.

Under salary sacrifice arrangements, an employee gives up part of their pre-tax salary and in return the employer agreed to provide a benefit. For example, under a pension salary sacrifice scheme the employee gives up part of their gross pay, while in return the employer makes an equivalent contribution to the employee’s pension. This means the employee saves on income tax and both the employee and employer save on national insurance contributions. The employer may use the national insurance contributions savings to help run the scheme or to top up the employee’s pension.

However, you need to ensure you have consider all the implications of salary sacrifice schemes, particularly in relation to tax credits/universal credit and the national minimum wage.

The tax position on employee benefits and salary sacrifice may change so it is wise to continuously check the HMRC website for the most up to date information.

Choices in benefit plans

Cash or benefit?

Some organisations prefer to provide cash to enable employees to purchase the benefits that best meet their needs. This is often called ‘clean pay’ and the benefits are it is easy to communicate, understand and administer. The downside is that staff could:

• Spend more money buying their own benefits than it would have cost the organisation to do so on their behalf
• Spend time at work researching the best deals
• Make poor choices

Flexible & voluntary benefits

These schemes aim to offer the employee choice by providing flexibility over their individual benefits package, however there are differences which need to be considered.

Flexible benefits arrangements allow staff to very their package to meet their own needs. The dividing line between pay and benefits is less fixed than in standard reward packages. In most schemes, individuals are able to either retain their existing salary while changing the mix of various benefits they receive or move their salary up or down by taking fewer or more benefits.

Voluntary benefits allow staff to buy products or services, at a discount, through their employer out of their taxable income or through salary sacrifice arrangements. These schemes differ from flexible benefits as the employee pays for the cost for the cost of the benefits.

Such initiatives may help address inclusion and diversity, be cost effective and assist in harmonisation of reward practices.

When offering these schemes, its important that the choices and their implications, are made clear to employees. If the options are seen as complicated, or the method of making choices as difficult, then individuals may just keep their existing benefits package and the time and resources spent on introducing the scheme will have been wasted. It may be better to offer a limited but meaningful choice of options.