Recognising that employees are different, and creating a package which contains at least one thing to appeal to everyone, is a key role for the reward function.
Today’s employees are often offered a wide choice of benefits. Typically, these include: pension schemes, share schemes such as sharesave, share incentive and long-term incentive plans, flexible and voluntary schemes including home computing initiatives, childcare provision, and savings arrangements, for example, through credit unions.
The government supports many of these initiatives through tax and national insurance breaks for individuals and employers. The UK is moving quickly to a position where such incentives are an expected part of the package offered by large employers, so have ceased to be a differentiating factor between companies.
Employers strive to communicate these benefits effectively to staff, explaining how they work and what the employee stands to gain.
As employers extol the virtues of their schemes, employees make hopefully informed decisions about which are right for them. These decisions are generally influenced by how good and affordable a deal looks. Once a scheme is launched, the employer’s focus generally turns to administration.
However, the timings of scheme launches, which are often linked to the financial calendar, invariably leads employees to decide whether or not to join a scheme without reviewing their overall position.
For example, water cooler banter may encourage a 20-year-old to take their lead from a 50-year-old, despite having different requirements. Employees may also commit all their available money to the first scheme launched, then find that another plan offering them better value is subsequently offered.
The reward function can help by fostering improved overall awareness of the schemes available and of the differences between them, and by providing effective tools to enable employees to help themselves.
For example, while stakeholder pensions have not been a great success, they have encouraged the application of decision trees, which use a series of simple questions to capture an employee’s attitude to factors such as investment risk (important in share and pension schemes), lifestyle choices and dependencies. This enables employees to make more informed decisions about their requirements.
The important thing is not just deciding which benefits to select. Many employers offer share schemes to all employees, and some spectacular gains have been achieved from these. By the very nature of these schemes, employees build up shares in their employing company.
When salary, pension and shares are viewed in the round, the majority of an employee’s wealth can be tied to their employer’s fortunes. Salary and pension cannot be unlinked from the employer, but shares can, through diversification. Financial advice or education is seldom provided when shares mature, but this is a significant time, because there are tax and risk issues to be considered, including risks associated with continued share holding.
While we might expect executives to take some tax and financial advice, many do not, and are often startled to receive reward statements revealing how much of their wealth is tied to their employer. Granted, these executives form a small proportion of our workforce. But this can also be a huge risk for modestly-paid employees, who can amass shares in their employing companies worth a multiple of their annual salary.
Employers are not required to provide advice, but even in an age where paternalism is no longer de rigueur, it’s hard to argue morally that we should not do more to help. After all, would you really leave all your eggs in one basket?
