Employee benefits: an introduction

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’ well-being (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.

Our 2018 Reward management survey finds that the most common business reason for providing employee benefits are to attract, recruit and retain the employees to support current business needs, while the most common external driver influencing benefit provision are legal and employment obligations and legislation.

Traditionally, employers provided benefits to retain their people (after pay had attracted them initially) or because they felt a moral obligation towards their workers.

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 simply 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 flexible working) 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. See our factsheet on strategic and total reward.

One concern of employers is whether their people are in a position to adjust to the new benefit landscape where they shoulder more of the risk (and reward). As well as the moral duty some may feel towards helping to educate their staff about the possible consequences of their benefit choices, there is the business case that a financially well workforce can bring to the organisation. Our Employee financial well-being report has more on the advantages this brings.

Our 2018 Reward management survey finds that main benefits employers offered to either all employees or dependent on their grade, location or occupation include those covered below.

Pensions

Due to legal requirements, these are now widespread. One of the more expensive parts of the employee benefits package, workplace pensions are often at the centre of major change across all sectors.

Holidays and time off

Employers are required by law to offer certain levels of paid annual holiday, although our 2018 Reward management survey finds that many offer more than the minimum.

There are also statutory entitlements to other types of time off work including maternity, paternity, adoption and parental leave, while other leave arraignments are not supported by legislation, such as bereavement. As with holidays, many employers often provide more generous time off arrangements than required legally. See our Working time factsheet.

Healthcare and risk benefits

These benefits may be provided to ensure both the welfare and productivity of employees. Our 2018 Reward management survey finds that common types of benefits include:

• occupational sick pay
• employee assistance plans
• death in service/life assurance
• eye care vouchers
• gym (on-site, subsidised or discounted membership)
• flu jabs
• healthcare cash plans
• private medical insurance
• permanent health insurance
• critical illness insurance
• dental insurance.

Some benefits tend to cover all employees, such as occupational sick pay, while others are dependent on such factors as grade, occupation or location, such as private medical insurance.

Group risk insurance policies, including group life assurance, group income protection and group critical illness, transfer some of the risk to a third party. They are a benefit that can be highly valued by employees as well as providing access to a wide range of extra support at relatively low expense. Employers should seek expert when setting up or changing a group risk insurance scheme to ensure optimum cover is provided and all tax efficiencies are maximised.

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). 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.

Other benefits

Employers may offer a diverse range of other employee benefits including: unlimited holiday, concierge services, free or subsidised staff canteens, bring your god to work day and a nap room.

Cash or benefits?

Some employers prefer to provide cash to enable employees to purchase those benefits that best meet their needs. This approach, often called ‘clean pay’ is easily communicated, understood and administered.

However, on the downside, staff could:

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

Voluntary, discount and flexible benefits

Voluntary, discount and flexible benefits schemes aim to offer employee choice by providing flexibility over individual benefits packages, but it’s important to distinguish between them.

Both discount benefits and voluntary benefits allow employees to buy discounted products or services through their employer out of their own taxable pay or via a salary sacrifice arrangement. Voluntary benefits are more formal. They are often arranged by a benefits provider, and purchases are made via the payroll. Discount benefits are less formal, with employees making purchases from their bank account. While the employer does not pay for the benefits provided under both types of schemes it may incur research, administration, and communication costs. 

Flexible benefits arrangements (known also as ‘cafeteria benefits’ or ‘flex plans’) allow staff to vary 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, employees are able either to 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.

Such arrangements can align with the increased focus on reward individualisation, help address inclusion and diversity, be cost-effective and assist in the harmonisation of reward practices, especially during a merger or acquisition. In practice, flexible, voluntary and discount benefits schemes may be used by the same organisation.

When planning to introduce ‘flex’, it can be useful to start by offering benefits on a voluntary basis – though sometimes the planned move to flex never happens. The idea is that this allows organisations to test the popularity of various benefits, design and fine-tune their subsequent scheme.

When offering these schemes, it’s important that the choices, and their consequences, 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 much of the resource spent introducing the scheme will have been wasted. In some instances, it may be more appropriate to offer a limited but meaningful choice of options. Our report Show me the money! The behavioural science of reward has more on how employees may respond to choice.

Before introducing, revising, or removing a benefit, it’s important for people professionals to ask:

• Why is the organisation introducing/offering the benefit? How does it support the organisation’s business and people goals? How does it reward the values and behaviours needed?

• How does the benefit fit into the HR and reward strategies? Does it support the people management and development practices the organisation requires?

• Will the change be valued by current and future employees? Have their views been researched?

• How will the benefit be launched? Who are the key internal stakeholders and how will they be involved? Does the launch team have the required skills, knowledge, and support?

• How will the organisation explain what's being introduced, and why, to line managers? How will the benefit be explained to staff, including what they must do to access it? How will the benefit be communicated on an ongoing basis?

• How will the change be explained to external stakeholders, such as investors or customers? Do their views need to be considered and, if so, how?

• How flexible are the implementation and communication plans to changes in the business context?

• Do employees have the knowledge, skill and attitudes needed to make informed decisions? Is there a need to invest in financial awareness?

• Does the organisation need to invest in the technology that will allow it to assess whether the benefit is meeting the organisation’s goals?

For more on benefits communication, and evaluation, see our Reward management surveys and our employee communication factsheet.

Contacts

The International Employee Benefits Association - IBEA

Group Risk Development (GRiD) - the group risk industry body

Books and reports

CRONER REWARD. Employee benefits report. 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.

ROSE, M. (2018) Reward management: a practical introduction. 2nd ed. HR Fundamentals. London: CIPD and Kogan Page.

Visit the CIPD and Kogan Page Bookshop to see all our priced publications currently in print.

Journal articles

BARTON, T. (2016) How to determine which group risk benefits best suit an organisation. Employee Benefits. 27 July.

BASKA, M. (2018) Businesses ‘throwing money down the drain’ by not communicating employee benefits. People Management (online). 27 July.

COLEMAN, A. (2015) Flex into the future. Employee Benefits. January. pp22-23.

EVERETT. C. (2016) Where next for benefits? Employee benefits special report. Human Resources. April. pp48-49.

LEWIS, D. (2017) Is this the end of employee benefits?People Management (online). 27 April.

CIPD members can use our online journals to find articles from over 300 journal titles relevant to HR.

Members and People Management subscribers can see articles on the People Management website.