Launching employee benefits from scratch

Sarah Coles explores how employers can set about creating a benefits package with no previous track record

Business start-ups could be forgiven for thinking benefits aren’t a priority. If you are running a business out of the back bedroom with the help of friends and family, it’s only natural that perks will be fairly low on the list of priorities, and possibly somewhere behind getting premises you don’t have to sleep in.

But it won’t take long before benefits start to become part of the business plan. Employ staff and holiday and sick pay are then being offered. Entice one salesperson with the promise of a company car and suddenly fleet management issues are on the agenda.

Whether an organisation has been only trading for a few months or for a number of years the chances are a number of benefits will have been put in place. However, rather than continuing to simply spend money on perks in a haphazard manner, it would make more sense to put a benefits package together in a way that supports business objectives, and provides a real return.

When implementing any benefits strategy from scratch, it is necessary to set objectives. Lisa Page, a senior consultant from Aon Consulting, says: “Before you start, spend time upfront thinking about what you want to achieve.”

Scheme objectives may be driven by the needs of human resources such as recruitment, retention or engagement. They may also include broader business goals such as improving productivity.

This process of developing a benefits strategy entails thinking about the organisation as a business and finding out what perks can be used to help drive it. It also necessitates looking outside of the organisation at businesses operating in the same arena and the benefits that they offer.

Andy Lister, head of employee benefits at benefits provider Grass Roots, says: “Consider the marketplace. Where do you recruit from and where do you lose staff to? Do a bit of benchmarking. It’s quite difficult to recruit and retain people if they are being offered significantly more elsewhere.”

Once it is clear what the competition is offering, employers have to decide whether to match it, or beat it.

Protection perks
Kim Honess, head of flexible benefits consulting at Watson Wyatt, says: “[The way forward] depends on whether organisations are trying to benchmark against their competitors or whether they have decided to be an employer of choice and do something innovative beyond that, that maybe others haven’t thought of.”

Employers could start by considering some basic form of protection in the shape of a pension, life insurance and healthcare benefits. Page says that “many employers feel a duty to put something in place to protect employees if something should go wrong”, such as an accident or ill-health.

Philip Hutchinson, a principal in the benefits solutions department for consultancy Mercer, explains that such perks also offer protection for employers as they help to control sickness absence and ensure staff are supported if they are unable to work.

A pension also offers organisations the security of knowing that their employees will eventually be able to afford to retire. For employees, it is also an important basic standard. Hutchinson explains: “Most people won’t join the organisation unless [it] offers a pension scheme. When they join the employer, some don’t join the scheme, but it is important that they know it is there. It says something about their employer and [its] responsibilities.”

He points out organisations needn’t go beyond providing a low-cost stakeholder pension scheme which, if well communicated, should help project the image of a responsible employer. Organisations that employ five or more staff are legally obliged to nominate a stakeholder pension provider if they do not already provide a scheme open to all staff, but they do not have to make contributions. Although this obligation will be removed by the new Pensions Bill , employers will instead have to comply with the government’s national pension savings scheme which will be introduced from 2012. Employees will be automatically enrolled into either a personal account or an employer-sponsored scheme into which they will contribute 4% to be matched by a minimum employer contribution of 3%.

Healthcare also delivers benefits for employers in that it helps to control sickness absence, however, it can be costly. While some employers may consider single cover medical insurance, or even extending cover to an employee’s family, the outlay can be high, especially for smaller organisations that cannot negotiate so hard on risk benefits. However, Hutchinson says: “For many organisations, the protection advantages make the outlay worthwhile.”

This would be especially so in the case of senior executives or key staff. However, employers that are unable to fund private medical insurance (PMI) for all employees could consider offering it as an option through a flexible benefits scheme or as a voluntary benefit. They could also consider funding other cheaper alternatives, such as a healthcare cash plan either paid for by the employer or as a voluntary benefit. Many employers, due to their duty-of-care obligations around workplace stress, have introduced an employee assistance programme (EAP) to give employees access to counselling services.

Apart from providing some level of basic protection for both employer and employee, organisations should also consider their recruitment needs when devising a benefits package. The perks on offer must be attractive to those they want to recruit, whether young professionals or call centre staff.

Darren Smith, reward consultant with Hewitt Associates, says: “If [organisations are looking for] graduates, benefits like pensions may not be that relevant because they are coming out of university with huge debts and may be looking for more pay to help them with that, or benefits like gym membership or travel insurance.”

A similar approach can also be applied when considering possible perks to help retain staff.

If employers have a broad population, with very diverse needs, there’s a danger that meeting the needs of both potential and existing staff could break the bank. Therefore, there could be a case for flexible benefits, or at least offering an element of choice.

Smith says: “If you are looking at retention, the needs of the population may be very diverse and may change over time.”

A flexible benefits scheme gives staff the option of selecting perks as and when they need them, for example, childcare vouchers for those with young children. It also helps to support employee engagement, claims Alistair Denton managing director of Motivano, who says staff will be “making their own decisions about what they want”.

Whether employers offer a flexible benefits scheme or not, it pays to find out what perks staff would like. Honess says: “If you are trying to improve engagement, start with staff surveys of what is likely to engage people – in terms of benefits themselves and the design of a package.”

Although increasing employee engagement by getting staff to go the extra mile is quite a sophisticated HR goal and goes beyond benefits, staff surveys can be of use to any organisation putting together a benefits package. It is a waste of time and money providing perks that employees do not value. Chris Bruce, director of marketing and technology at Thomsons Online Benefits, says: “It’s important employers understand what staff want. Don’t just conjure up a package and forget to ask what’s important to them.”

But employers must be careful about managing staff expectations by making it clear the limitations that they are working within.

Lister says: “Asking staff can be a bit of a dead-end if you’re not careful. They may come up with a long list which is difficult to fulfil unless you have a bottomless pit of money.”

Benefits objectives can also go beyond HR goals to encompass broader business goals too. Smith says: “It’s becoming more common to think about the bigger picture, and the corporate agenda.”

The connection may be indirect and entail using benefits as tools to push the business objectives. So, for example, a company wanting to boost productivity may try to foster employee engagement, and therefore look to benefits to help drive that.

Alternatively, the impact may be much more direct, for example, by using benefits to support the employer brand. Smith says: “If [an employer has] a green agenda, that can be supported by bikes to work, carbon offsetting, environmentally-friendly car policies, buses to work and that kind of thing. These reflect the corporate social agenda it is trying to pursue. Likewise if an organisation wants to be family friendly and promote work-life balance it can look at childcare vouchers, concierge services, more flexible working hours and benefits to help people balance their home and work priorities.”

Once the objectives have been identified, the second step in developing a benefits package is to consider the constraints that may be placed upon any strategy.

These are less exciting to consider, but are vital. Money, says Hutchinson, is by far the most important one: “It’s the biggest thing that drives all of this.”

This doesn’t necessarily mean that having a small budget blows an employer’s chances of meeting its objectives. It just requires some creativity. “Look at your return on investment and what you can justify in terms of recruitment and retention. The simplest to start with is your basic protection benefits alongside an affinity programme, or voluntary benefits package, that reflect your aims,” he suggests.

Organisations should also look closely at tax-efficient benefits and any savings that can be made for both employer and employee by offering them through salary sacrifice. “You may take benefits and put in salary sacrifice and make it more attractive because of the national insurance (NI) savings for the employee. Or you could use the NI savings for the employer and plough it back into the package,” adds Hutchinson.

Time scales
Other major constraints include the extent of the commitment of senior management and time scales. It may prove difficult persuading the board to back a comprehensive package of benefits they are unfamiliar with to be unveiled in one go or, if they are willing, to be more realistic about feasible time scales.

Hutchinson suggests: “The first year could be a pilot [scheme]. Don’t over-engineer it. You can use feedback from that to drive further development. That way, you can ensure you don’t have to rip anything out further down the line.”

Alternatively, a big splash may be just what an organisation is after. Bruce explains: “We worked with an organisation that had grown quickly, and had a share option scheme in place. Then it floated, and the shares had to be replaced with something equally engaging.”

The organisation launched a comprehensive package of flexible benefits, with unusual options to capture the imagination of employees.

This level of investment may seem like an impossible dream for many employers with smaller budgets. But as long as an organisation starts by setting its objectives, and uses even the most modest budget creatively, it should be able to achieve an effective benefits strategy.

Top benefits and objectives

The most popular benefits to put into a scheme:
Pension plan 96%
25 days or more paid leave 81%
Occupational sick pay 80%
Training and development 80%
On-site car parking 73%
Tea/coffee/cold drinks 72%
Christmas party 64%
Life assurance 63%
Private healthcare 58%
Car allowance 55%
Childcare vouchers 53%

The most popular objectives for offering a reward package:
Support business goals 79%
Reward high performers 67%
Recruit and retain high performers 62%
Achieve or maintain market competitiveness 58%
Support career development 52%
Manage costs 48%
Ensure internal equity 48%

Case study: Betfair builds on early protection perks

When Betfair was founded in 2000, it was at the peak of the dotcom boom, and the company was competing for scarce, skilled employees.

While other start-ups were setting up ping-pong tables in reception and providing other funky perks, it decided instead to offer a package of protection benefits.

HR director Audrey Stewart says: “[We came up with] some good early benefits, including private medical insurance, life insurance, critical illness and permanent health insurance. It set [us] apart from the competition and offered a level of protection for the company too.” However, over time, it became clear its 1,000 UK staff would value other benefits more, so in October 2007 it launched a flexible benefits scheme, through Thomsons Online Benefits.

This includes a basic level of protection perks, so staff still get the message these are important, but it also has additional options.

Stewart says: “With an average age of 30 [years] and an interest in sports, [staff were] interested in keeping healthy, so we offered bikes for work and health checks.”