Thought leaders: Academic insights: New ideas

With the economic climate still tough, employers will have to be inventive about how they construct their benefits packages this year, says Peter Crush

Barely a week into 2011 came news from Income Data Services (IDS) confirming what most already knew: no one – except, perhaps, FTSE company chief executive officers, whose income rose by 55% last year – will be financially better off this year. Against retail price index (RPI) inflation of 4.7% (which is expected to stay above 4% all year), both private and public sector staff will, in real terms, be worse off in 2011 compared with 2010.

According to the IDS Pay Report, published in January, private sector pay is growing at half the rate of inflation (2.2%), while public sector workers can expect to see pay increases struggling to reach 0.75%.

Such pecuniary hardship will increase pressure on compensation and benefits professionals to make their organisation’s benefits package work harder this year. According to industry experts, it is the barely-improving economic situation that will continue to be the main influence on employers’ attitudes to benefits provision, and there may be some interesting new ideas to ponder.

Some providers expect to see a growth in alternative remuneration benefits, which can be offered at little expense to the employer. The level of employee spend through schemes such as voluntary benefits is also expected to rise, particularly for discounted gift cards, such as supermarket shopping cards. Communicating such benefits well can yield staff the equivalent of a 4% pay rise.

According to the UK Gift Card and Voucher Association, annual growth in gift cards has accelerated from typically 5% a year to 10-15% a year since the recession, and 40% of this rise has been from business-to-business cards.

Employers such as British Gas have incorporated gift cards into an online reward points system, which are also predicted to increase in popularity this year. British Gas also promotes the scheme as an engagement tool, citing it as a factor in boosting engagement from 64% in 2008 to 74% in 2010, with 576 staff having received awards – equivalent to 64 a month.

However, it is this aim of improving engagement and morale that could run into problems for benefits administrators this year. Kate Russell, author of How to get top marks in managing poor work performance (Gibbons Williams Publishing, 2010), says: “This year, [employers] possibly underestimate the work they will have to put into re-evaluating what their attitude to reward is. Employers are facing a dilemma about managing employees who, on the one hand, they expect to earn their keep, but on the other, they are aware morale is low.
“Bosses need to incentivise staff enough to encourage discretionary effort, but without being held to ransom by them.”

Re-set commission structures

Put simply, this means employers may need to re-set their commission structures to more attainable, levels. But although this is starting to happen as 2011 unfolds, Russell says there are complex, cultural issues that also need addressing – these are harder to change.

Employers are typically responding in two main ways. Firstly, providers are reporting a rise in the use of incentive schemes to push employee behaviour away from individual productivity rises to more team-related outputs. This reflects the economic situation in a strategy of moving away from customer acquisition to customer service and retention.

This fits with what Dr Elizabeth Kelan, lecturer in work and organisations at King’s College London, believes should happen. “Organisations must alter their benefits mix to tap into, and raise, organisational citizenship,” she says. “How? They need to prove it with a benefits package that says ‘we are all in this together,’ rather than just rewarding, say, the salespeople only.”

BSkyB’s director of reward, Dev Raval, says his company has been taking this concept to its extreme, with any new benefit added since the recession reflecting this cultural mindset. “While we have not been impacted by the downturn as other companies have, we have to keep an eye on what might happen,” he says.

This means being as egalitarian as possible, he explains. “We have introduced long-service awards, which are the same for everyone, and when we celebrated our 20th anniversary, everyone got 100 free shares. It is all about being more team-orientated because we feel this is a stronger driver of engagement. In fact, the long-service award idea came out of our employee forum. We do not think success is seeing what the senior people get. All permanent employees get exactly the same standard of benefit.”

Within the last year, the broadcaster has also launched a supermarket discount scheme, through which its employees have already spent £1 million, gaining an average 5% discount.

Performance pay

The second, and vastly different, response from employers is to pay for performance. Lisa Calvert, HR director at Getty Images, says this is her plan for 2011. The organisation introduced pay-for-performance several years ago.

“The best performers should absolutely get the best wages,” says Calvert. “We do not want our people to think their reward is some sort of entitlement. We are moving our reward and benefits to the next level by saying take-home pay should not be guaranteed just because you have been here the last year. Our business is about being better all the time.”

There is no right or wrong answer, of course. Getty Images’ pay-for-performance scheme is accompanied by ‘spot’ rewards that managers are allowed to dispense, of between $500 and $5,000 (approximately £310-£3,100). Last year, 350 awards were made from a designated pot of money for the benefit, and Calvert has set a target of 40% of employees receiving an award in 2011.

Personalised rewards

BSkyB also enables its managers to reward staff with gifts, ranging from spa weekends to iPods. This trend of using individual recognition schemes with more personalised rewards is set to continue this year.

In 2011, employers are also expected to take tight control of costs. But rather than removing benefits altogether, they are making tweaks, for example, to levels of cover. For benefits such as group income protection, moving to policies that pay out for a limited term, say five years, can result in lower costs.

Some employers are also looking to reduce their benefits spend on new employees, for example by paying lower pension contributions for new joiners.

But while some providers are keen to play down the suggestion that 2011 will be a buyer’s market for benefits, Cable and Wireless Worldwide’s head of reward, Paul Bissell, argues: “Pure logic says the balance of power lies in the hands of buyers.”

Bissell says he is actively looking at renewal quotes, and finding new ways of driving more value out of existing deals. “We are cautious about additional benefits spend, so we are doing all we can to leverage packages and approaching our suppliers for what we would call best value rather than penny-pinching. For our healthcare renewal, for example, we have improved our employee wellbeing.”

One strategy also gaining traction this year is combining the best parts of private medical insurance (PMI) and health cash plans into a single product. As cash plan products have started to improve, many organisations have been considering whether to ditch PMI altogether, especially as its price inflation is 7%-8% a year. Cash plans are price-stable, meanwhile.

Use of cash plans

With benefits like these working together rather than against each other, PMI can be used to sweep up larger claims and minimise excess costs, while cash plans can be used for everything below this.

Although it is the economy that will broadly set this year’s agenda, there will be some legislative challenges too. Some changes, such as the restriction on tax relief for pension contributions from next month, will have little impact generally because it will only affect those likely to exceed the new £50,000 annual allowance.

Likely to have a much bigger impact are the forthcoming pension reforms, which will start to be rolled out to volunteer organisations from April 2011. The reforms, which are due to come into effect more widely in October 2012, will see the introduction of compulsory minimum employer and employee contributions, auto-enrolment and the national employment savings trust (Nest).

The final report from Lord Hutton and the Independent Public Service Pensions Commission on public sector pensions is expected in April.

Also due to come into effect that month is the 1% rise in national insurance (NI) contributions. This has led to predictions that employers could be forced to reduce their pension contributions to offset both the rise in cost of employing staff, and the expected increase in their employee population with a pension.

To mitigate the cost impact of complying with the reforms, employers should be looking to increase their pension scheme take-up now, so they are not faced with a significant increase when their staging date for auto-enrolment arrives.

Rise in pension costs

Some cost-cutting reward professionals already have their eyes on tackling this. Some organisations, such as insurance company LV=, began auto-enrolling all new staff last year to avoid a sudden rise in pension costs. Other employers, such as credit card provider Capital One, have moved their pension schemes into a flexible benefits plan. This is one way in which they can offer tax-efficient pension contributions via a salary sacrifice arrangement.

Jill Cunnison, operations and benefits manager (HR) at Capital One, says the company NI savings achieved in this way enabled the it to raise its employer contribution by 1% in July 2010 and increase the matching structure too, so if an employee puts in 7%, Capital One puts in 10%. “We are going to be promoting pensions more this year because our average employee age is only 34,” she says. “We need to convince them of its value.”

Cunnison says bolstering pension benefits can help with employee engagement. More employers are looking to take this route. According to the Office for National Statistics’ Economic and labour market review, volume four (October 2010) in 2009, for the first time, the number of active members of defined contribution (DC) pension schemes offering salary sacrifice arrangements (500,000) exceeded those that did not. According to Cable and Wireless’s Bissell, salary sacrifice is still an untapped benefits saver. “There is a lot more scope to it than people think,” he says.

Last year, Cable and Wireless Worldwide introduced a fleet salary sacrifice scheme that resulted in 130 car orders in its first year, providing staff with savings of £250,000 and giving the company mileage cost savings. “These are the win-win benefits strategies that [organisations] should be looking at more this year,” says Bissell. “Tax has the potential to produce some of the most imaginative solutions.”

Anything that saves money should please benefits managers at a time when employers are soon to face a possible rise in pension costs.

Pension governance

Governance is another area that will be scrutinised in 2011. Vance Kearny, HR director at Oracle, says: “Until last year, we had a trustee-managed pension scheme, but it was costing us £2 million a year in administration.

“That is why the flexible benefits route will become more popular. Not only have staff taken control and increased their contributions voluntarily, but the money we have saved from not having trustees has enabled us to increase the employer contribution from 5% to 6%.”

Benefits managers will always prioritise their efforts in areas where there are big-ticket savings. But it is in the public sector, which is under huge pressure to scrutinise costs, that much can be learned this year. Libby Grant, head of strategic HR services at the City of London Corporation, says she can chip away at her overall benefits bill but still offer perks that staff are happy with. “We are working really hard to form partnerships with local businesses so they can give discounts at fitness clubs, opticians, hair salons, and so on, to gain customers without it costing us. We are also leveraging the things we run, like the Barbican Centre, so we are offering discounts on productions. We even offer reduced cemetery costs.”

Grant says the year ahead is all about being imaginative and inventive, and being more bespoke about benefits. When economic needs must, benefits professionals must really show what they can do.

The Retail Distribution Review

The much-talked-about Retail Distribution Review (RDR) will be introduced in 2013 to give transparancy to costs paid by employers and staff.

• In the benefits space, the proposals most directly impact on corporate business by removing traditional commission payments for new group pension schemes.

• For some organisations, this will result in the costs of advice and administration for group pension schemes being charged as fees.

• In a survey carried out by Jelf Employee Benefits in November last year, 50% of respondents said they currently paid their pension consultants by commission, so will potentially have an extra upfront cost if they seek to change their scheme in order to cope with the new legislation.

• This could be a problem for employers because an upfront fee (even if lower than commission paid previously) added to the establishment or change of a pension scheme is likely to be unwelcome.

• The RDR may result in some employers disengaging from pensions saving for employees.


• Volunteering is not always thought of as a benefit, but it could be set for a revival in 2011.

• YouGov research commissioned by independent charity V, Volunteering is the Business, which was published in January, found staff had a strong appetite to engage in volunteering schemes, with 58% of the 1,512 respondents saying they would volunteer if their employer helped them. Some 96% of managers agreed workplace skills can be enhanced through volunteering, and two-thirds of managers (63%) also thought volunteering could have a positive impact on an individual’s career progression.

• Jacki Connor, director of colleague engagement at Sainbury’s, says the company’s Local Heroes corporate social responsibility (CSR) volunteering scheme – in which staff identify their own cause to help – is a cost-neutral benefit that has a real impact on engagement. The retailer matches any money staff raise up to £700.

Current issues


• The Office for National Statistics’ (ONS) Economic and labour market review, volume four (October 2010) showed active membership of occupational pension plans fell from 9.2 million in 2006 to 8.7 million in 2009.

• Pension members in the private sector totalled 3.3 million, down from 3.6 million in 2007, while those in the public sector, 5.4 million, have grown by 200,000 since 2007.

• With the Pensions Act 2008, which includes auto-enrolment and compulsory contributions, around the corner, an extra five to nine million pension scheme members are expected to be created in the next few years.

• As a result, minimum company pension contributions could fall for new joiners.


• The prognosis is not good for 2011. Research by the British Chamber of Commerce, published in January, found that 49% of the 345 businesses surveyed planned to implement a pay freeze, with 6% planning wage cuts.

• Just two-fifths said they would be giving staff a pay rise.

• The Fair Pay Review, led by economist Will Hutton, is due to publish its final proposals on public sector pay this year.

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