Analysis of Employee Benefits within an Organisation

Introduction

The purpose of this essay is to open the discussion about one of the most relevant features for the human beings these days, the payment schemes such as salaries, wages and benefits that employees receive in retribution of their work. On this paper work it will be developed the next question “If employees undervalue the cost of benefits, why should a company not drop benefits and simply add more direct compensation?”

On first instance, is precisely to say that the direct compensation is the monetary benefits that employees receive in return of the service they provide to the company, such as basic salary, rent allowance, travel allowances and medical reimbursements among others; on the other hand indirect compensation is the non monetary benefits that the employees receive such as life insurance, health security, pension, vacations and flexible timings among others. Thus, the payment programs have become one of the most important issues on the human life nowadays, that's because they define the opportunities and choices that one person has to provide wellness, security and a future to their families or their loved ones, and in the same way feel recognition for their capabilities and efforts.

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Consequently, there have always been different systems of pay and compensations to suit the employees and employers requirements, for this reason there are wages with non monetary and monetary benefits. Employees typically depend on salaries and wages to get a stable income and on benefits to provide health and security. For employers, compensation decisions influence their cost of doing business and thus, their ability to sell at a competitive price in the goods and/or service markets. Far beyond that, compensation decisions determinate the employer’s ability to compete for qualified employees in the labour market. (Ferris, et. al, p.528)

Employee compensation practices differ across employment units (e.g., organizations, business units, and facilities) on several dimensions. Dimension like Form (cash or benefits), Level (How much do people disserve to earn for their job), Structure (hierarchies and pay differential within an employee unit), Mix (how and when cash compensation is disbursed) and finally Pay Administration (pay policies and who is in charge of that process).The central point of the employee compensation discussion has been on defining these dimensions, researching why organizations differ on them, and considering whether such differences have consequences on employee behaviours and attitude; Along this work this topic will be developed deeply and it will be shown examples of how it can vary and how this contribute to the question above.

Now then, as it was mentioned before indirect compensation refers to benefits, is essential to understand that this benefits are forms of value (non monetary) that are provided to the employee in return for his/her job. That's why when it refers to employee benefits the most common are: vacations-holidays, employee stock ownership plans, retirement plans, health insurance, life insurance, disability insurance, pension, leisure bonuses, etc. Benefits are increasingly expensive for businesses to provide to employees, so the range and options of benefits are changing rapidly to include, for example, flexible benefit plans and timings.

Despite that some employees undervalue the benefits, it's important to say that companies cannot drop benefits that easy because two essential reasons. The first reason is because of the law; the benefits must be given to the employees as part of the remuneration of their job or services, that's legal issue and must be part of the pay policies of the company. The second reason is because employees like parents or elder people prefer benefits as they find them important for their families, their retirement or their pension schemes. Other aspects that companies find important are that the indirect compensation can encourage the employee to do a better job, creates a sense of trust and loyalty between the employee and the employer.

This way compensation plays such a key role because it is at the heart of the employment relationship, being of critical importance to both employees and employers; also that?s a reason why organizations are becoming more concerned with positioning employee compensation as a strategic human resource management function in order to obtain competitive advantage.

Types of Employee Benefits

Each country has different forms of salaries, wages and benefits. In the UK, employee benefits are categorised by three terms: Flexible Benefits, Voluntary Benefits and Core Benefits.

The first term is Flexible Benefits, also called “Flex Scheme”, is where employees are allowed to choose how a proportion of their remuneration is paid. This is normally delivered by allowing employees to sacrifice part of their pre-tax pay in exchange for a car, additional holiday, a shorter working week or other similar benefits, or give up benefits for additional cash remuneration.

The second is Voluntary Benefits; these are the collection of benefits that employees choose to receive. These tend to be schemes such as the government-backed, Bike2Work and Childcare Vouchers (Accor Services, Busybees, Sodexho, KiddiVouchers, Early Years Vouchers Ltd). Employee Discount schemes are often setup by employers as a perk of working at the organization. Finally, Core Benefits is the term given to benefits which all staff enjoys, such as holiday, sick pay and flexible schedule.

In recent years, many UK companies have used the tax and national insurance savings gained through the implementation of salary sacrifice system, to fund the implementation of flexible benefits. In a salary sacrifice arrangement, an employee gives up the right to part of the cash remuneration due under their contract of employment. Usually, the sacrifice is made in return for the employer’s agreement to provide them with some form of non-cash benefit. The most popular types of salary sacrifice benefits include childcare vouchers and pensions, that’s a reason why indirect compensation still being important for some workers like those who are parents or those who are close to retirement.

Disadvantages of employee benefits

In the UK these benefits are often taxed at the individual’s normal tax rate,which can be expensive if there is no financial advantage to the individual from the benefit.
The UK system of state pension provision is dependent upon the payment of National Insurance Contributions – NIC. Salary exchange schemes will result in reduced NIC payments and so are also liable to reduce the state benefits, most notably the state second pension.

Advantage of employee benefits

The benefits are an important component of a company’s remuneration package for attracting and retaining its employees. The benefits serve as incentives to the employees and encourage them to work hard for the organisation, instead of give up part of their salaries. These also help in building up job satisfaction.

In the same way, there can be advantages for employers; one of the major advantages is an easing of their own cash flow. Another advantage is the option to negotiate discounts with benefit providers, this could represent savings for the company when the personnel is large, so the provision of non cash benefits can consequently be cheaper than the part of the salary that the employee is giving up.

Some benefits are attractive even for young workers such as a company car or mobile phones, which can be provided by the employer and without having to make these arrangements by the employee. On the other hand, tax advantages are extended to employees as well as employers. Some benefits package provides a tax advantage; for example, if the employer pays for the mobile phone, this is treated as a non-taxable benefit, so this can represent a significant tax saving over the course of a year, for both parts.

Compensation Management Influence Over Employees and Companies

(Example 1) On this case, AVIVA an insurance company has proposed closing its final-salary pension scheme, because is considered inequitable and unsustainable. On this case, the reason of the closure of the final-salary pension was because it took two-thirds of Aviva’s contributions to UK staff pension arrangements, but only one-third of UK staff had the final-salary benefit. This proposal come after a string of businesses announced their intentions to close final-salary schemes to current members. Construction firm Taylor Wimpey, Trinity Mirror, Pirelli, Fujitsu, Barclays, Morrisons, Vodafone, BMI, Dairy Crest, IBM and Costain all said they planned to do so in the last year.

Now this could be a problem, as it means the typical worker will lose a third of expected pension payments, but also it can proved the high costs of indirect compensation for organizations.

On the other hand, incentives and motivation programs can reduce the cost of the benefits expenses for the companies; on the following two examples it can be proved. The company name is Rim Hospitality, which is a hotel, resort and boutique property management company. With rising workers compensation expenses, Rim Hospitality needed to find a cost effective solution that would motivate employees to help reduce these costs, and also maximize efficiencies with employee productivity and scheduling.

The plan developed by this company consisted in implementing a prepaid MasterCard card as the award to the employees, which provided the employee the freedom to choose what they want, when they want it. With this plan, Rim Hospitality experienced positive results almost immediately which have steadily increased. Thus, over two years, they reduced workers compensation claims by 29% and therefore this meant more productivity to compensate the cost of benefits and savings of $634,000 during that time.

There is another case where incentives and motivation programs can reduce the cost of the benefits expenses. This example is referred to Pepsi Bottling Group (PBG) which is the world’s largest manufacturer, seller and distributor of Pepsi-Cola beverages. In 2005, PBG was working on a better way to manage the rising cost of health care for its employees. They did that by educating their employees on various health related issues. First of all, PBG implemented an employee survey to get feedback on the interest of their employees. Thus, all the employees who had participated in the survey were rewarded with a prepaid card as an incentive; following the survey period, employees were offered a variety of healthcare educational classes to attend. When the class was completed, the employee received an additional prepaid Card as a reward for completing the class. Time after the implementation of that program, PBG has noticed that expenses generated by health disease, absence, emotional conflicts, and health insurance costs were lowered in 47%.

Now then, sometimes a bad healthcare can drive up the cost of the benefits for employees and employers. Similar to the previous, this example shows that according to the U.S. Bureau of Labour Statistics, as of 2009, trucking had an injury rate 30 percent higher than other U.S. industries. This coupled with higher average medical and indemnity costs, makes employer costs will go higher; therefore this will lead to higher workers compensation costs and any savings employers thought they were accruing will be lost when injuries go up.

So, the higher rates can be attributed in part to several factors. Because of the nature of their work many drivers are out of shape, eat badly, smoke too much, don’t do exercise and hardly ever get enough sleep. As a result of this, they found themselves susceptible to heart attacks and diabetes, as well as a myriad of strains, sprains and various other muscular-skeletal injuries. This makes truckers a danger on the road but also a danger to themselves, and by the way driving up employer’s costs. (http://web.ebscohost.com)

(Example 5) Sometimes working in a non traditional way like working from home is a benefit that workers value, especially if they have families. This example shows that an AIM survey made in 2006, indicated that 40% of companies in Massachusetts were looking at ways to decrease the compensation budget, which meant that workers wouldn’t have been happy with that news, for that reason employers found the way to offset the dissatisfaction that will cause. They proposed to give flexible hours of work, telecommuting, and other lifestyle benefits; but perhaps, one of the most important benefits was the opportunity to work from home or 50/50 (half in the office and half in home), that was a differential factor and was used even as a recruiting tool.

That is an important benefit that more and more companies have put in practice, because they can trust and rely on people, this is a management new thinking and change of attitude, where people find that they work hard when no one is looking at them, that they don’t need a supervisor all the time or someone just watching if they’re working. This aspect was very important for families and parents who wanted to expend more time with their sons and relatives.

Another option growing in popularity is flexible time and banks system, which consist on time off available to use at any time, instead of the typical, two weeks of vacation, five sick day permission, and 10 holidays. That way, employers are not asking to the workers if are they sick today, or if do they want the day off; because with the banks system and flexible times they can make some long weekends or take some time off in the middle of the week. That type of flexibility is definitely attractive to employees. (www.businesswest.com)

By a short break, it has been found that the cost of the benefits could be a high risk when the PESTE factors (Political, Economical, Social, Technological and environmental) affect the organization. (Example 7) In Colombia for example, in the nineties when the government decided to open his economy to the neo liberal model of free trade and the invisible hand of Smith that in theory regulates the economy and the prices of buy and sale, a lot of Organizations in the textile industry suffered the consequences of that Governmental policy.

There was a specific company that went to bankrupt in a short time after the economic opened, that company was Coltejer who had been one of the biggest companies in the textile industry in Colombia; the reason is that this company gave good benefits to their employees which made this one of the top organizations in where people desired to work, the benefits ranging from computers and household facilities provided by the company to cars that employees could acquire after have worked for some years in the company. So basically, when the Chinese and East Asia products got in the Colombian market, Coltejer could not compete with the bargaining and cheap prices of those products, that because of the high costs of benefits that Coltejer was holding with their employees, among other reasons, and the company could not bear and overcome the price difference, despite the fact that external products were low in quality; so in this case it can be seen that high costs of benefits could provide good talents and satisfied employees, but also could be a high risk option for the organization if an external factor affect the business.

In the same way in Chile, the shoes industry was affected by the PESTE factors; it was basically after signing the free trade agreement with China 4 years ago, and as a result of the undefeatable prices of Chinese shoes companies, many companies in Chile had to reduce staff and reduce both compensations direct and indirect, which brought turbulence and imbalance to the companies.

Although, external factors could be positive in a medium term perspective, like natural resources prices, especially the petroleum high prices; where in countries like Venezuela usually bring big wealthy to the people, such is the case of PDVSA, the Petroleum Public Company of Venezuela, which is one of the biggest companies in the petroleum industry over the world, and because the petroleum bonanza and the high prices of the barrel make that PDVSA could give spectacular and expensive benefits to their employees, such as car, housing, vacations, education (sons of PDVSA employees receive education allowances and scholarships to study abroad, and free education in Venezuela). So this shows the magnitude and the impact of the benefits on the employee’s life and in the company’s costs.

A survey made by Personnel Today found that, in half of 700 organisations who responded to the survey, take-up of childcare vouchers was less than 6%, and only 9% of organisations reported more than 30% staff take-up of the vouchers. So it means that poor communication of the benefits of the schemes is the result of the low take-up. However, the survey shows that there is growing awareness of the existence of childcare voucher schemes, which enable employers to offer working parents vouchers to pay for registered childcare without having to pay tax or National Insurance contributions. Most organisations (81%) said staff awareness of childcare vouchers had increased over the last five years, and that offering childcare vouchers could be a deciding factor in attracting working parents and retaining key staff. The final conclusion of the survey applied to the organizations, shown that 91% either agreeing or strongly agreeing that offering childcare vouchers improved an employer’s reputation. The research also looked into employer interest in offering a similar scheme for staff that needed to look after elderly dependants and the results shown that 59% were interested in introducing them. (www.personneltoday.com)

As it has been said along this work, good benefits are useful to attract and retain qualified staff for a company, now then, it also help the company to save money. That?s because attractive benefits facilitate a company’s bottom line on multiple levels, and one that shouldn’t be ignored is the cost of replacing employees who become dissatisfied and leave. The cost to replace an employee can be anywhere from 30% to 40% of somebody’s salary up to 150%, and is money that the employer is going to spend on recruiting and retraining. (web.ebscohost.com)

On this order, employers might offer workers a motivating and attractive package that says, if you stay with me five years or 10 years, at the end of that time, I’ll give you a raise that might be equal to 50% of the base salary. Because it’s on an individual basis, the employer cannot take a tax deduction for what he is spending, but if the employee got skills and talents that the organization needs to his optimal productivity, it would be more important to tie the employee to the organization for 5 or 10 years. That arrangement appeals to people at certain stages of life. For example, someone with two children is going to be staring to college costs in a little less than a decade. By offering to double his starting salary after 5 years, the employer can bring a little financial-planning reassurance to the worker, while not having to worry about losing the assets he brings to the company. Employees nearing retirement age might also find value in such an offer.

This is the case of Unisys (IT Services Company) which has had a flexible benefits scheme for 13 years. This has changed a lot over that time to reflect staff interests, and is split into three categories – security, wellbeing and lifestyle. Unisys workers average salary is about ?50,000. Andrew White, reward manager, says “We found high interest in security-type benefits rather than lifestyle, so tried to tailor as many as we can in the insurance sector. Security benefits include critical illness insurance, travel insurance and group income protection. The most popular benefits are critical illness, dental insurance, holiday-trading and income protection.”

On the case of retail giant Tesco, who offers its employees a wide selection of benefits, including a defined benefit (DB) pension scheme that is open to all staff, three all-employee share schemes, life assurance, childcare vouchers and discounts at theme parks. Tesco also offers all its employees a discount card (the Privilege card), which gives a 10% discount on shopping in all Tesco stores and online. Staff can save a maximum of ?730 a year. Staff feedback shows the Privilege card is top of the list of most valued benefits. The reason the Privilege card is so popular is because staff get immediate benefit from it, they get money off their shopping receipt. (http://proquest.umi.com)

On the other hand, voluntary benefits include a staff tariff on the Tesco Mobile network and discounts at Tesco Bank. Each pay period, Tesco includes a new offer, for example extra deals on clothing, home ware or photo processing. With nearly 290,000 UK staff and from different nationalities, Tesco has a wide range of needs to consider.

Telegraph Media Group is an organization who gives to their employees’ wide range of benefits, and that’s the cause of why more than 80% of the employees have declared to be satisfied with benefits. One of Telegraph’s most popular benefits is the pension scheme, where the company pays a lot into that and employees don’t get charged for administration. In the same way there is a good website for the pension scheme. This is very important issue for employees therefore in the current situation, because they can save their pensions and don’t have to worry about the public pot. (http://proquest.umi.com)

Another valued issue is the health and wellbeing services provided by Telegraph, such as its on-site gym, free and subsidised fitness classes, free corporate massage service, and on-site doctor with physiotherapy services. All this kind of smart compensation policies ease the life of the employees and also the productivity and work environment of the company.

Another example is the one about the Oil and Gas Company Subsea 7, who employs 1,800 people in the UK and they consider that is essential to create a clever payment strategy to attract and retain the best people. Considering this the company first introduced tax-efficient perks offered via salary sacrifice arrangements, then built on this with a total reward statement and a flex scheme. To ensure the package is understood and appreciated by staff, it tracks a variety of measurements, including the number who has enrolled on the benefits website, the choices they make, how often they visit the site, and the take-up of different benefits. (http://proquest.umi.com)

Conclusions

During this essay, it has been tried to demonstrate what is better for both employees and companies in terms of compensation. As it has been shown the compensation could vary depending on the company policies and the HR strategies. As human beings we are looking always for the best choice for us, it must be a choice that satisfy the basic needs one person has and at the same time gave him/her wellbeing, comfort and happiness. In the same way companies are looking for the best way to attract and retain excellent staff, which brings quality, productivity, growth, status, competitiveness and profits to the company.

Now then, compensation is just the manner in which the employees get some pay in return of the services they have given to the company. The main question of this essay put a hypothetical situation in which employees undervalue the cost of the benefits, and the company has to decide whether remove the benefits and add more direct compensation, which would means add more monetary value, more basic salary or just more allowances; now then, as it has been shown before, the needs of each employee differs depending on the age, personal aims, family type, lifestyle, culture, religion and even education level. So it’s essential that the employer knows perfectly well the characteristics and the staff behaviour, in order to offer the best compensation package for each group of workers, and also to save money and gain productivity and competitiveness.

As it has been mentioned before, the company could gain productivity and competitiveness just by offering to their employees’ nice conditions, because the worker who feels that the company really care about him and give to him everything he needs could work the double in the half of time, giving better results and being committed with the business, so that’s how an employer can create loyal and good workers. On the other hand, when companies chose the right compensation packages for their employees, they will be saving money and the reason is because on one side they won’t waste money in benefits that employees don’t like or undervalue or even they are not going to use, and on the other side the save money because if they keep the employees satisfied they won’t be need to spend money on recruiting and training new staff.

So, my answer to the main question is that, employers have to do everything necessary to keep employees satisfied, as they are the gears of the machine, so if in this case or in one specific company the employees undervalue the benefits and prefer more direct compensation, I must say that on first instance a general check in of the compensation program must be done, so it means to check the different dimension of payment such as form, level, structure, mix and the pay policies of the company. Is necessary to know that some benefits cannot be removed, as they must be given as a legal issue (e.g. social security or pensions), other flexible benefits could be removed or added according the characteristic of the employee, because I can’t offer a 25 years old person, whose marital status is single a childcare voucher or long term plans benefits, may be this person could be more attracted with travel allowances, or just have more cash to spend on leisure activities; on the other side a mother with little kids should be more interested in flexible timings, work from home, health care insurance and vacations, and in the same way an old person is probably thinking in pension schemes. Now then, for the company instead, the fact of add more direct compensation could represent a more complicated manage of the cash flow and at the same time could be more expensive, as employees are not giving up part of their salaries in exchange of the benefits, and some companies usually negotiate discounts with some benefit providers, instead it cannot be done with the employees salary; in addition, with indirect compensation employers get tax advantages, that could be relevant throughout of the year.

In conclusion, if the employer adds more direct compensation he could lose money, because he won’t have tax advantages, there won’t be salary sacrifice system so there won’t be possibility to negotiate with benefit providers and as a result it will be also more complicated to manage the cash flow without those benefits. Now on the other hand, if the employees are not completely satisfied with the indirect compensation, it will mean that the work environment could be affected and as a result the productivity, competitiveness and loyalty of the staff which in a medium term could be expensive for the company. So it’s a complex situation, which I’m agree in part, because it require a smart strategy that permit the employer hold indirect compensation in order to benefit the company wealth, assets and resources, but at the same time is necessary offer good perks to employees in order to create incentives and wellbeing among them and thus boost each employee to get the best of them.

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