Flexible Benefits Supplement 2005 – Interview: Richard Freeman, visiting scholar London School of Economics. Topic: Evolving flexible benefits.

Harvard professor Richard Freeman shares his views on flexible benefits with Jenny Keefe.

Sex and the City, Desperate Housewives and now Lost, British television has long been in the grip of an American invasion. But our thirst for US imports doesn’t stop at glossy dramas. As with many HR trends, flexible benefits schemes began across the pond too.

And like flex, Richard Freeman, was born in the US and is the Ascherman Professor of Economics at Harvard University and a visiting scholar at the London School of Economics where he researches labour markets.

Freeman explains that flex has come a long way from its humble beginnings: "[Schemes] used to be called cafeteria plans. The idea was like being in a cafeteria: you were given £10 to spend to buy your lunch and if you didn’t want to eat anything you could keep the £10. There was a minimum benefit, such as retirement but then you could keep the rest."

And will the real flexible benefits schemes please stand up?

Nowadays, so many voluntary benefits schemes are being touted as flex, it can be hard to sort the wheat from the chaff. "The distinction is that you have a fixed sum you can allocate to different benefits and, say the young worker doesn’t really want any of the benefits, what they really want is the cash because they are poor, well that’s fine." Let’s be clear then: 10% off at a local hairdressers does not a flex scheme make.

So why has flex been such a hit that it has spawned imitators? Freeman believes it all hinges around choice. With fewer employees fitting into the stereotypical 2.4 children, Labrador and a Volvo mould the new schemes are more appropriate. "A one-size-fits-all package becomes less attractive. Flex is a very virtuous scheme. This way, you are able to treat every worker in much the same way. They are able to have a bundle so they can choose the benefits that are most valuable to them. So if my teeth are really a problem, for example, I [can] have a lot of dental [options] so I should be able to put more things into my teeth. It is more efficient.

"If you offer a maternity scheme but there is a 45-year-old person who is not going to have kids or is not going to have any more kids, they can no longer take advantage of this. So the scheme is very focused on a certain set of people."

He adds that flex goes a long way towards creating fairness in the workplace. "Some universities in the US offer to pay for the tuition of the children of faculty. That’s a huge benefit for the person who has children, and for the person who has eight children that’s overwhelming. I think that you are paying that person maybe twice what you are paying a person who doesn’t have children and that’s not quite fair.

"It’s a wonderful benefit, but what about the person who isn’t eligible for that? So choice is really important, lets get people the benefits that they want – it’s fairer for most workers."

Another plus point is that couples can pool their resources. "When you have two-earner couples – and this is very advantageous – the two of them can sit down and say ‘well I’ve got this benefit and maybe my family is covered’ and ‘well I’ve got this benefit and you are covered’."

One reason why the flex bandwagon has been gathering speed is technology. "With computers, it’s become much easier to give people an amount of benefits – it seems a natural way to do things. I think it was very hard for employers at one point: the administrative expenses were high, and now computers do make it very easy.

"I keep saying the ultimate way to make money is to have a computerised consultant and then we just sit there and don’t have to try very much because our computer is giving us the answers and setting it up."

The trend has rolled out to smaller organisations too. "That’s where computers come in really handy. If you are a small employer, you can pay a provider a small fee and it can offer you the same things [as a larger organisation]."

Employers must be alert to the pitfalls, however. For instance, it is often said that a little of what you fancy does you good. But what if, rather than pension contributions, what you fancy is booze and an MP3 player?

Freeman adds there is such a thing as too much choice. "You probably don’t want to let people go to zero pension because then they are going to be on the streets and you are going to pay for it another way by taxing others. We are not going to allow elderly people to live on the streets.

"The other thing we’ve learnt from studies of peoples’ choices is if the employer comes along with the recommended choice – the default system it’s called – people won’t even think: they will just go along with the default.

"There should be multiple defaults. This is what they do in the pension area according to age, and people are very responsive towards what the employer thinks. I’ve never looked at my pension – I made some decision years ago."

When it comes to holiday trading though, Freeman believes that staff should be able to sell as much holiday as they like. "If you want to be a workaholic, you are free to be a workaholic."

And don’t forget to shout about your schemes from the rooftop. "People should be told about their choices every year and employers need to think through carefully how they make the offer. The computer thing is really a good way. You can keep tabs on it. You know which people are using which benefit so you can inform them of whatever it is."

For American employers there is an added incentive to drum up interest. "There is an interesting thing in the US with these benefits schemes because, in order to get tax breaks, some of the benefits have got to be used by regular workers as well as upper income managers. Once tax dollars are involved they don’t mean them to be a tax break for super rich people.

"So you will often find that employers are trying hard to convince regular workers to take up a benefit, saying: ‘I can offer a special deal to you. If you take advantage of my maternity programme and you are a normal worker I can sweeten it up for you, whereas I won’t sweeten it up for the high income employee’."

So what does the future hold for flex schemes? Apparently, we should take our cue from down under. "In Australia, the construction business is very interesting because everybody is a small employer and people shift jobs all the time and are working on a project every couple of months. There is a municipal corporation of some sort that basically does the retirement thing. The idea is you have something that covers the whole industry and all the small employers can buy in and it isn’t so expensive. So it would be natural to have that for other industries."

Freeman adds that he has a bone to pick with HM Revenue & Customs. "When some workers give up salary for benefits they are now being paid in principle less than the national minimum wage. So when they put the minimum wage in, some organisations just cut the benefits.

"That’s the problem with this minimum wage thing: it should not be a minimum wage, it should be a minimum total compensation including benefits – that would be the correct way to do it and so that would resolve the issue."


Academic credits: Richard Freeman has a string of credits to his name. Currently a visiting professor at the London School of Economics, he is a Herbert Ascherman professor of economics at Harvard University.

Previous activities: His other activities include serving as: co-director, Labour and Work-life Programme at Harvard Law School, director of the Labour Studies Programme at the National Bureau of Economic Research and senior research fellow in labour markets at the London School of Economics’ Centre for Economic Performance.

Current projects: While working in the UK, he is involved in researching the effects of the web on labour markets, social behaviour and the economy. And if that wasn’t enough, Freeman also acts as a consultant to the Department of Trade and Industry on structural reform in Britain.

Flexible businesses

According to Richard Freeman, business has become more flexible as the link between skilled employees and customer focus has become more apparent. He believes this can be illustrated by the contrast between old and new working practices, in which flexibility plays a key role. Variable reward together with flexible working arrangements, for example, can help employers to better meet the needs of both groups.