The Effectiveness and Equality of Flexible Benefits, and its Impact on Individual and Organisation Performance
Introduction
In this essay, the definition and origin of flexible benefits is introduced, and the status of flexible benefits in the UK is presented. This is followed by a concise discussion to evaluate the effectiveness of flexible benefits to both employees and employer, particularly on personnel motivation and individual/organisation performance. The challenges of implementing flexible benefits are raised, and the issues of equity of flexible benefits are examined. Finally, the key elements in this essay are summarised.
1.0 Flexible benefits
According to CIPD (2008a) flexible benefits are also known as ‘cafeteria benefits’, which is a scheme that allows employees to vary their pay and benefits package. Namely, flexible benefits providing the staff with a choice to adopt, or flex their reward package, in order to meet their personal circumstances (Hutchinson 2004 p18-25). Hutchinson has also described a “flexible benefits” plan as a “common benefits trading platform”, enabling the employees to trade the benefits between each option of their preference.
Originating from North America in the 1960s, flexible benefits have been rather popular in USA – approximately 85% of larger firms adopted flexible benefits schemes by the mid-1990s. A main reason for its popularity is tax efficiency. (Long 2006: 443 as cited in Shields 2007:337) The uptake of this idea in the UK has been slow due to administrative complexity, taxation issues and also inertia within organisations towards change. (Smith 2000: 379; Woodley 1990, as cited on Marchington and Wilkinson 2000: 341)
However, the growth of flexible benefits plans in the UK is gradually increasing. A CIPD (2008b) Rewarding Management Survey showed that 13% of employers currently provide flexible benefits, compared to 8% in 2007. This could be attributed to the improvement of administration technology, increasing focus on ‘customers -driven’ concepts in reward packages (Armstrong, Murlis, Group, 2007:471) and a wider recognition of its effectiveness in an organisation.
2.0 Effectiveness of Flexible benefits
2.1 Flexible rewarding package customised for a diversified workforce
Reward strategy plays a crucial role in human resources strategy. Flexible benefits schemes, as part of a total reward package, significantly impacts recruitment, retention, employment relationship and individual performance. Hutchinson (2004: 3) argued that traditional reward packages and fixed benefits will no longer be considered for most organisations as it does not meet the needs and demands of an increasingly diversified workforce. Namely, the previous ‘one-fits-all’ benefits package will be phased out because employees demands change with personal circumstances e.g. age, family responsibility, financial situation, lifestyle and personal preferences, and these needs evolve with time. (Shields 2007:336) In addition, Baker (1988) claimed flexible benefits can also avoid the duplication of benefits from a couple both with their own income.
- Talent recruitment and increase staff retention
Hutchinson (2004:3) stated that a well-designed flexible benefits scheme is part of an integrated total reward package that not only reduces staff turnover but also helps to attract more applicants. Consequently, this lowers the cost of recruiting, selecting and training new employees. These saving could be funnelled into developing the existing experienced employees to improve individual and company performance.
Nevertheless, Wright (2004: 210) argued that flexible benefits might be more effective in terms of the attractiveness of employers to recruiting new people rather than retaining people. Wright (2004) proposed that by adopting a flexible benefits scheme an organisation could build up the image of the company and become a powerful employer that stands out among competitors, which evidently helps to attract talents to join the organisation, especially when the labour market is tight. This view is shared by Kinnie et al (2000, cited in Redman and Wilkinson 2006:35) who pointed out that HR policies such as recruitment, selection and reward will appear to be more important in attracting new candidates.
Echoing this view, Boddy (2005: 355) recommended the benefits in a total reward package should align to both HR and business strategies, ensure these benefits match the diverse workforce demands, offer value for money and build up the employer’s brand. This is reflected in a statement by Douglas Ross, Roche Corporate HR manager, in a recent article, where he says that that offering a flexible plan helps to ensure a competitive edge in the hunt for talent. (Washington 2008)
- Work-Life balance
Nowadays there is a stronger demand for a work-life balance, particularly for people with young children and a family. Spinks and Moore (2007: 37) envisaged time will eventually be the primary currency and will be bought and sold at the demand of the employees. According to an employee benefits magazine survey in 2008, the popularity of buying and selling holidays is rising in the benefits menu, from 73% in 2007 to 85% in 2008, ranked as second in popularity, just slightly lower than the childcare voucher scheme.
Flexible benefits form a platform for employees to obtain more holidays apart from those given statutorily in exchange for a salary scarify. This helps to promote their work-life balance, although most companies will limit the hours/days of holiday purchase or accumulation.
- Personal finance and wellbeing
In addition, flexible benefits provide an opportunity for employees to have better control of their personal finance and wellbeing by allowing them to buy cover based on their needs, according to the director of employee benefits solutions at Prudential (Phillips 2007). This is because these flexible benefits are tax-efficient, such as childcare vouchers and bicycle loans (which are offered through a salary sacrifice arrangement), according to employee benefits magazine. (Golding, 2008) Employees can use the salary sacrifice scheme for their own benefits whilst being efficient in tax and NI while the employer could also save on NI.
- Cost saving for employers by sharing responsibility
Cost saving can be achieved from two aspects. Firstly, the employer could save huge costs on tax and NI if employees choose benefits through the salary sacrifice scheme. Secondly, flexible benefits could promote savings for the company, because the employer is helping its employee by providing the benefits that they required and appreciate, otherwise the resourses would be wasted if the company provide benefits undesired by the employees. (Torrington, Hall, Taylor, 2005:664) However, deciding the amount of flexibility in the benefits can be difficult in practice. (CIPD, 2008a) The best way is via communication with employees and surveying to reveal their needs.
Moreover, a flexible benefits scheme is a way for the employer to share fiscal responsibility on the benefits, as the employees would have to pay the extra cost if it exceeded company budgets. Therefore, from an employer point of view, flexible benefits protect the risk of any increasing cost of benefits for the company, because each employee takes responsibility for their own choice of mixed benefits and take into consideration of any increase in price. (Hutchinson, 2004:4)
2.6 Challenges of flexible benefits implementation
The flexible benefit scheme must be administered strategically in order to give maximum effectiveness. However, there are many challenges regarding implementation in an organisation. The complexity of administration and the costs of implementation remain the main obstacles, according to the Tower Perrin Flexible Benefits Research in January 2007. Donovan (2007, as cited in Matthews 2008: 11) claimed costs are still great for companies if the scheme is not self-funded or it is bespoke. A company with a separate HR and payroll system may struggle with flexible benefits due to the different location of personnel data. (Matthews 2008:17)
Giving employees total freedom to choose the benefits can also be problematic to employers. More choices imply greater administration complexity, and may lead to adverse selection, i.e. wrong choices are made jeopardising its effectiveness value (Armstrong, 2002: 413) Therefore, a compromise must be struck between excessive flexibility that encourages unsuitable choices, and a narrow field of choices that does not meet employees’ expectations. (CIPD 2008a)
3.0 Individual and organisation performance
This section examines how the aforementioned effectiveness of benefits promotes satisfaction and motivation to enable enhanced performance at individual and organisation level.
3.1 Motivation and individual performance
Researchers revealed that flexible benefits schemes can result in a positive relationship and increased employee satisfaction, (Barber, Dunham and Formisano, 1992:45), and the increased employee’s satisfaction with benefits, will promote a higher level of motivation and productivity. (Beam and McFadden, 1988; Employee Benefits Research Institute, 1982; Rosenbloom and Hallman, 1986)
Based on Vroom’s (1964) expectancy motivation theory, McKenna (2000:568) stated that a flexible benefits system has relevance in the context of expectancy of motivation because it allows employees to choose the best rewards system that most fits their needs. In addition, Heneman (2002: 19) also stated that flexible benefits enable employees to select the elements that have the most positive value for them, therefore benefits with the most value are likely to be motivational.
Although some flexible benefits sit well in relation to motivation in the literature review, the fact is that few organisations currently implement a flexible benefits scheme. (Marchington and Wilkinson: 2005:362). Smith (2000:385) argued that the pre-occupation with simplicity and performance-related pay is a barrier in the UK to thinking about evaluating a flexible benefits plan, apart from the reasons of complex and expensive setup and maintenance fees, and the difficulty in deciding on the amount of flexible benefits. (CIPD 2008a)
Cahrs (2006, as cited in Dencker et al 2007: 209) asserted that in order to motivate employees and attain the desired performance, companies must take a more customer-driven approach to their benefits programme to meet personal circumstances. Relating this to the discussion earlier regarding the need of employers to recognise the different needs of a diverse workforce and provide the best value benefits to each individual, both views proposed the most effective approach is to treat employees as a customer, in order to satisfy them.
Psychologically, such empowerment provids employees with a sense of control that is critical in an employment relationship. As such, flexible benefits enhance the psychological contract between employees and employers. This is supported by the Kavanagh Recruiter Magazine (2006) who proposed that psychological contact is a ‘win–win’ situation; if employees have the confidence that their best interests are looked after and their capacity and needs are integrated into the business process, they would response with high motivation and ‘reward’ the company with an enhanced performance.
Moreover, White (2005, as cited on Matthews, 2008:11) suggested flexible benefits are relevant to performance based on the concept of psychological contract. He mentioned that low performance and hence high turnover is associated with lower skilled staff due to low engagement and involvement, however, senior staff conventionally enjoy the greatest investments in terms of relationships to employer sand psychological contract.
Taking a good example in the banking sectors, Furness (2007) affirmed that banking firms adopt flexible benefits to motivate employees and boost engagement in the workforce. The Royal Bank of Scotland (RBS) has been offering employees flexible benefits for nearly nine years, for instance. Jim Cowan, senior consultant, remuneration and benefits at RBS, claimed to have evidence of a 20% higher ‘engagement score’ when their employees tooke up three or more benefits.
Therefore, we could conclude employers providing flexible benefits to employees could lead to employee satisfaction and higher motivation, and consequently enhanced performance.
- Organisation performance
Senior managers may look for methodology to improve organisation performance by flexibility, in response to a market with increasingly competitive due to globalisation and deregulation. (Becker and Gerhart 1996; Boxall and Purcell 2003, 18-19) Flexible benefits packages are one of the ways to enhance organisational performance if the total reward package is aligned with both HR and the business strategy to meet the needs of the diverse workforce.
As discussed, financial elements in flexible benefits schemes offer a huge saving to organisations in terms of tax and NI, and also the sharing of the cost of benefits with employees. These cost savings form an important part in the assessment of overall organisational performance.
Overall, the motivation derived from good flexible benefits will drive an enhanced performance from employees, and directly contribute to organisational performance. Nonetheless, evidence suggested that whilst flexible benefits promote enhanced performance due to higher satisfaction, there is also a link between such satisfaction related performances and the equity of flexible benefits. This will be addressed in the next section.
- Equality of the flexible benefits
A study from Tremblay et al (1998:22) indicated that the justice of flexible benefits influences employees’ attitudes in terms of satisfaction, e.g. distribution justice and the procedural justice, and would, therefore, affect personal motivation and performance.
4.1 Eligibility issues
In an ideal flexible benefits system, individuals make their own assessment and choose the best benefits, thereby enhancing their perception of distribution equality. The system allows employees to participate in the process, thus enhancing the perception of procedural justice in benefits compensation. (Kaufman and Kleiner 1993:153) However, there is still evidence showing deviation from this ideal equality.
Issues have been raised in regards of the equality of flexible benefits schemes. According to research carried out by the Employee Benefits Magazine (2007), only 19% of the employers offered all their staff flexible benefits, and 8% of employers offered them to some staff – meaning 73% of employers do not offer flexible benefits schemes at all.
Meanwhile, a “Managing Best Practice” survey summarised in the Industrial Society’s report, (2001) revealed that about 19% of the companies in their sampling population provided flexible benefits only to middle managers or above, and among 5% of the companies, only the top 10% of the employees are eligible for flexible benefits. Evidently, from these studies, there is an inequality issue regarding whether flexible benefits schemes are applied to every employee. The perception from some companies is that the level of flexible benefits should commensurate with the value to the company, such as capability and contribution delivered.
- Fairness to employees in terms of freedom choice
Cole and Flint (2003, as cited in Yu et al 2008: 69) believed that giving the employee a choice in terms of benefits selection is related to the high perception of fairness. However, despite flexible benefits being an ideal way to respond to different employee choices, some argue it is the call of line management to emphasise different types of employment packages to employees, not employees themselves. (CIPD Reward Management, 2007)
In addition, Otten (2008) questioned whether flexible benefits offer true flexibility for employees, particularly the company-paid elements, such as private medical insurance and life insurance, which does not permit employees to flex out of the core benefits, such as pension. This demonstrates the paternal role of the company to meet employee needs without giving employees the right to choose/decide.
Moreover, most insurance benefits are not tax efficient under UK taxation law. The employees will have to pay tax on the insurance apart from income tax. It could be argued that such benefits may cause tax disadvantages for employees.
4.3 Force to choose?
In addition, in terms of salary sacrifice schemes, employees who are forced to choose would argue they may obtain a cheaper offer from another provider, but the employer would disagree as a bulk service (economic sale) is negotiated and paid, so should thus represent good value to the majority of employees. This, however, also depends on the uptake of the scheme, so the governance process could be a complicated one.
- Shifting the costs to employees?
As pointed out previously, cost-savings for employers remains important for companies considering flexible benefits, due to the dramatic increase of the burden of benefits, especially health insurance. Therefore, some companies may strategically structure its reward package to promote the sharing of the financial responsibility of the benefits. However, trade unions may oppose such flexible benefits schemes, alleging that these flexibilities are a smokescreen that reduces entitlements and shifts the cost and risks to employees themselves. (Shields 2007: 337)
Conclusions
Flexible benefits schemes have significantly impacted organisations as whole. The scheme improves talent attraction and workforce retention, and builds up a good relationship through employee empowerment, engagement and involvement. Flexible benefits have brought advantages and benefits to both employers and employees, in the form of work-life balance, financial incentives and company performance.
On the other hand, flexible benefits have drawbacks in terms of complexity of administration and huge running costs. It also needs transparency and communication to ensure successful implementation. Some issues were also raised in terms of flexible benefits fairness to employees, such as distribution justice and procedural justice.
Finally, flexible benefits reward strategy is particularly suited to organisations with a diversified workforce; and if integrated seamlessly with the HR strategy and business objective, it will enhance individual motivation and increase the organisation’s performance.
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