Jul 29, 2010


Policies on employee benefits need to be formulated in the following areas:

§  Range of benefits provided: some benefits, such as pensions and holidays, are expected, others, such as permanent health insurance, are optional extras.

§  Scale of benefits provided: the size of each benefit, taking into account its cost to the company and its perceived value to employees. Note that the perceived value of some benefits such as company cars or pension schemes (particularly in the case of older employees), can be very different from their actual cash value.

§  Proportion of benefits to total remuneration: in cash terms, a benefit such as a pension scheme can cost the company between approximately 5 and 15 per cent of an employee's salary. A decision has to be made on the proportion of total remuneration to be allocated to other benefits which incur expenditure of cash by the company. This policy decision is, of course, related to decisions on the range and scale of benefits provided, and it can be affected by decisions on allowing choice of benefits and on the distribution of benefits. Some companies try to move towards a 'clean cash' policy which minimizes the number and scale of fringe benefits.

§  Allowing choice: benefits will be most effective in the process of attracting and retaining employees if they satisfy individual needs. But individual needs vary so much that no benefits package or single item within the package will satisfy all employees equally. Younger employees may be more interested in housing assistance than a company pension plan. Some employees have ethical or political objections to medical insurance schemes. Not everyone wants a company car - especially if they live in an inner city area and have a spouse with a better car entitlement. Many people may prefer cash to an automatic benefit which is not precisely what they want. Allocation of benefits: policy on the allocation of benefits determines the extent to which it is decided that a single status organization should be created. If the policy is to have a hierarchy of benefits, then the allocation of these at different levels has to be determined, usually in terms of broad bands of entitlements - typically called benefit grades.

§  Harmonization: in the new flatter organizations, where multiskilling is prevalent and new technology is eliminating the old distinction between white- and blue-collared workers, harmonization of benefit packages is increasingly taking place. The objective is to increase unity of purpose and improve team work by abolishing invidious distinctions between benefits, rewarding different levels of responsibility and contribution by pay alone. Single status companies are becoming much more common. Full harmonization means that there are no distinctions at any level in the hierarchy between the benefits provided, which may vary only with length of service or specific market practice.
Partial harmonization may provide the same basic benefits in some areas such as pensions, holidays, sick pay and redundancy for white- and blue-collared staff, but have a hierarchy of benefits above this base according to job grades. These benefits could include company cars, topped-up pension schemes or medical insurance.

§  Market considerations: whatever degree of choice or harmonization is decided upon, the precise arrangements will always be affected by market considerations. It may only be possible to attract and retain some key staff by, for example, offering a company car in line with what other organizations are doing for similar jobs. To attract a senior executive, it may be necessary to offer him or her a special pension arrangement - especially if he or she is earning over the Finance Act 1989 'earnings cap' (£102,000 for the 2004/05 tax year). As in all aspects of pay, market considerations and the need to offer competitive packages may have to override the principle of equity.

§  Government policy: it is essential, when reviewing benefit policies, to monitor tax legislation in order to assess the relative tax efficiency of benefits and to keep employees informed of the implications for them. For example, since 2001 the government has substantially changed the basis of company car taxation to encourage individuals to drive more environmentally friendly cars and to discourage the provision of free private fuel.

§  Trade unions: trade unions are increasingly concerned with the whole remuneration package and therefore may be involved or ask to be involved in negotiating the provision and level of benefits. Many companies, however, resist negotiating such items as pensions, although they will be prepared to consult unions or staff associations on benefit arrangements and do sometimes have trade unionists as trustees of the pension scheme.


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