Employee benefits at Centrica

Overview of Centrica

Centrica was born out of a demerger from British Gas in 1997. The group now comprises British Gas, Centrica Energy, Direct Energy, Centrica in Europe, Centrica Storage and Dyno.

The group reported operating profit of £992m for the six months to 30 June 2008, down from £1.2bn in the first half of 2007 resulting in adjusted basic earnings per share decreasing from 21.4p to 11.3p.

As part of an ongoing cost cutting programme, Centrica reduced its workforce by 2,000 roles last year and outsourced a number of functions, including its central finance and human resources functions, and rationalized its corporate centre, removing over £30m of annual costs.

It aims to remove £60m from the operating cost base of British Gas this year, bringing the total reduction to £200m over two years.

The company announced a £2.2bn rights issue at the end of October, which it plans to use to fund its purchase of a 25% stake in British Energy.

Core benefits at Centrica

• Pension scheme: defined benefit and defined contribution available, depending on role
• Private medical insurance
• Personal accident and travel insurance
• Flexible benefits scheme

Biography: Nick Luff, finance director at Centrica

• Nick Luff was appointed group finance director of Centrica last March.
• He joined from The Peninsular & Oriental Steam Navigation Company where he was most recently chief financial officer.
• He held a number of other senior financial roles at P&O after qualifying as a chartered accountant at KPMG.
• He is also currently a non-executive director of the QinetiQ Group.

Main feature

Centrica strives to align all of its employee benefits with its financial targets and its ‘cycle to work’ scheme is no exception. The UK gas and electricity supplier has recently reopened the scheme to employees after a successful pilot during the summer.

Craig Truter, reward programme manager at Centrica, says that the campaign, entitled ‘Get fit, go green and save money’, was carefully designed to encourage staff to get fit by cycling to work; to help them meet the company’s green agenda by improving their environmental impact; and to help the company save money in the form of income tax and National Insurance in the process.

Under the government’s cycle to work scheme, employers invest a set amount of funding into the provision of bikes, on which they can claim back the VAT plus the balance of the bike from scheme participants via salary sacrifice.

“Instead of passing on the VAT saving wholesale to the employee, we pass it on with enough held back to offset some of our own costs required for administration of the scheme,” says Truter.

The company has invested £250,000 into the scheme, and claws back 2% of the VAT saving to cover the cost of administration, which has been outsourced to Grass Roots.

Nick Luff, group finance director of Centrica, (pictured) says: “The alignment of what’s good for our staff, what’s good for the environment, and what makes sound financial sense for the business is often relatively simple. Our staff are our greatest asset, and our experience has shown that a competitive benefits offering enhances the effectiveness of staff by increasing their commitment.”

Over the past 18 months Centrica has run extensive campaigns to engage employees and senior management in ‘Going Green’ initiatives and to help people understand how they can contribute to internal energy savings targets.

“This programme is already delivering positive results for the environment and for our finances – in 2007 we managed to reduce our office energy use in the UK by 10%,” says Luff.

The return on investment of Centrica’s cycle to work scheme equates to a combined employee and employer tax saving of just under £70,000. It’s therefore unsurprising that the scheme has been reopened in time for Christmas.

Truter says: “We’ve presented it to employees as a way for them to get themselves a Christmas present and think about any New Year’s resolutions that they might have, such as going green, so we’re trying to play on that emotional and psychological angle.”

Some 400 of Centrica’s 27,000 UK staff have signed up to the scheme, 60 during the first week of the re-launch alone.

Broad travel strategy

The cycle to work scheme is part of the company’s wider travel planning strategy. This includes a car share scheme to help reduce employees’ carbon footprint as well as the cost of company cars and car parking facilities.

The re-launch coincides with a review of Centrica’s company car fleet. Truter says: “We are reviewing our car policy in the light of the cost of providing company cars, the environmental impact, but also understanding the value of a company car to an employee in their total reward package. Truter says it’s a fine balance. “We are trying to strike a balance between being too paternalistic as an organisation and at the same time giving people real alternatives to help them change their own behaviour.”

Centrica is already tackling fleet costs and employees’ carbon footprint by reserving premium car parking spaces – those closest to the entrances of its sites – for cars emitting 120 grams or less of carbon dioxide per kilometre. This is in line with the new capital allowance rules for cars, which come into to force next April. The rules tax cars according to their CO2 emissions, and offer potential tax savings for both employers and employees.

Both cost and green issues are part of a policy review debate. “The government has made it clear that it wants companies to play an active role in reducing their environmental impact through their car fleets, so we are considering all of our options,” Truter says. “It is a little too early to consider what the outcome of our output will be, but we are very conscious that we need to balance the perceived value of cars to our employees against the impact that they have.”

Link to employee bonuses

Centrica tracks its employee health to help further reduce costs to the business. Truter says: “Where we have a high level of engagement around health and safety, we set a very high target on the number of accidents and incidents that occur and the reasons why they’re happening. We report on this and have real measures around them.

“We have 9,500 engineers out there, so by reducing the number of accidents we will directly reduce the number of costs to the business, in terms of insurance and vehicle replacement, and we will almost certainly reduce the number of working days lost. The promotion of safe and energy-efficient programmes collectively has obvious financial benefits.”

The company’s financial targets are connected to employees’ own bonus targets, which are partially based on their performance. For example, Centrica sets a target for the maximum number of days it allows staff to take off for sickness or accident, which are connected to people’s bonus programmes and linked through the entire organisation.

Truter says: “If we are exceeding our targets individuals themselves are impacted.”

An increase in the number of employee incidents and accidents would prompt Truter and his team to review the benefit initiatives the company is running, for example, driver training.

“If drivers are not driving in a way they should be or causing accidents to themselves and those around them, we would certainly go back to initiatives we were running, and we would see what role we could play through our occupational health or private medical insurance or driver training,” he says.

Those are factors that come into play when we measure what we’re doing through benefit programmes and the real impact to employees out in the field, as well as to the bottom line.”

Centrica reviews the effectiveness of its benefit programme every couple of years and sets employee targets accordingly.

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As a result of the company having been born out of a range of businesses over the last few decades, it tailors benefits according to individual roles, which range from engineers – which is the only division offering new joiners membership to a defined benefit pension scheme -s to call centre staff and those in its corporate offices.

Back to Employee Benefits Report for Financial Directors – November 2008