benefits
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Section XV
Flexible and voluntary
benefits programmes
Introducing flexible benefits, cafeteria benefits and package
compensation programmes
When employers started providing employees additional forms of compensation, that is,
additional benefits besides salary, their role was considered secondary vis-à-vis that
played by financial rewards insofar as being defined as “fringe benefits” (Torrington et al,
2008). Over time, however, the importance of employee benefits within any given total
reward package has crept up.
Albeit organizations by means of their reward managers and professionals differently
design and develop their reward philosophies and practices on the basis of the actions
and behaviour they aim at encouraging, in particular during the last years, there has
actually been an upward trend in employer resources allocation to benefits. In some
cases, the sum of money spent by organizations for their employee benefits accounts for
up to 50% of the overall reward budget, with pension schemes having a particularly
remarkable impact (Torrington et al, 2008).
The relevance and worth of the benefits paid by employers to employees in kind, rather
than in cash, is also different according to the different staff levels, with executives and
senior managers receiving up to 30/40 percent of their reward packages in the form of
benefits of different types (Smith, 2000).
Albeit, as it will be discussed later in this chapter, employers have to deploy considerable
financial resources and human efforts in order to offer these benefits, more often than
not, employees do not seem to really appreciate them (Torrington et al, 2008), insofar
as many individuals, when prompted to give their feedback, openly express their
dissatisfaction with the benefits package they receive from their employers (IRS, 2000;
Thompson and Milsome, 2001).
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Flexible and voluntary benefits programmes
In general, this feeling of dissatisfaction is caused by the misalignment of what
individuals value the most and would hence be expected to receive from their employers
in the form of benefits with what employers actually make available to them. According
to Thompson and Milsome (2001), “traditional benefits” cannot be effectively used by
employers to attract, retain and motivate most of the employees. Recent studies and
investigations, however, have showed that in some circumstances, namely when
employees are looking for a new job and in those cases in which individuals are more in
general forced to tight their belts, artfully devised benefits packages can actually
effectively help employers to attract quality professionals from the external environment.
It should neither be neglected nor underestimated the circumstance that benefits, being
directly or indirectly associable with cash, are essentially perceived by employees as part
of the financial reward component of the total reward package they receive so that their
hygiene characteristic, as intended by Fredrick Hertzberg, should not be undervalued.
Misalignment notwithstanding, therefore, removing from individual reward packages
those elements which have a hygiene valence would surely produce detrimental effects
upon employee engagement and motivation (Longo, 2011a). It is basically a form of
vicious circle, despite the efforts made by organizations, employees do not appreciate
the benefits their employers offer, which may then have no impact on their productivity;
but whether these would be withdrawn by businesses this may cause discontent and
negatively impact individual performance.
Making the business case for flexible benefits
The most effective approach organizations can have recourse to in order to employees
appreciate the benefits they offer to them is to simply giving individuals the latitude to
decide themselves what benefits have to be offered. Flexible benefits, cafeteria benefits
or package compensations are programmes essentially designed and introduced by
businesses in order to enable employees to decide, within a pre-identified set of benefits,
those mostly fitting their wants and tastes (Longo, 2011a).
Flexible and cafeteria benefits plans should enable employers to suit the needs of an
increasingly diverse workforce whilst keeping a cost-effective approach and avoid
pointless expenses for unwanted and unused benefits (Jurkiewicz, 2000; Charrier, 2000).
One of the most likely reasons for employee benefits not being appreciated by
individuals is represented by the likely employer inability to offer the range of benefits
meeting the needs of their varied generational workforce composition. Flexible benefits
approaches should indeed enable employers to attain this objective in practice (Parry
and Urwin, 2009). Different individuals have different needs and differently value
rewards, so that flexible arrangements, giving the opportunity to each individual to
choose the benefits he/she appreciates and values the most, can clearly help
organizations to avoid offering individuals the wrong benefits. In order to attain the
intended objective, however, benefits packages clearly need to contain an array of
benefits including those actually meeting and matching the needs of all of the individuals
and generations involved (Longo, 2011a).
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Flexible and voluntary benefits programmes
Over the last years, driven by the tax regime and the healthcare system in place, flexible
benefits have boomed in the US, where they are actually still well-developed and
widespread (CIPD, 2010). In the UK, after a slow start in the early 2000s, flexible
benefits approaches seem more recently to have captured the interest of a constantly
increasing number of organizations (Torrington et al, 2008). By and large, this approach
can be actually still considered as a rather typical Anglo-Saxon phenomenon. Indeed,
flexible benefits programmes seem to be destined to further develop in the UK and,
more in general, in those countries where the declining bargaining power of trade unions
and the consequent growing focus on individually agreed reward packages with
employees, are characterizing the composition side of financial reward practices (CIPD,
2010).
Albeit reward managers could find it absolutely important to introduce flexible benefits
arrangements within their organization, in order to gain the required businesses’ boards
support, they need to show that resorting to such an approach is objectively justified
and financially viable and wise (Furness, 2006).
Furness (2006) claims that the main reasons for HR professionals wanting to introduce
flexible benefits schemes are to give individuals the chance to choose, to increase
employee perceived value of benefits and to improve the effectiveness of organizations
recruitment and retention practices. Indeed, the former two objectives would be
basically pursued by employers to the benefit of employees, whereas the latter two to
the benefit of themselves.
From the employee perspective, benefits are definitely seen, as they actually are, as part
of their tangible reward package, whilst the latitude given to them to choose the benefits
they actually want can to some extent be seen as an intangible benefit. From this point
of view, it can be concluded that flexible benefits schemes offer individuals somewhat of
a combination of tangible and intangible rewards. Individuals decide and have then the
leeway, intangible aspect, to determine the tangible reward they want to receive. This
can clearly contribute to let these perceive the value of the benefits they get as even
more important than that represented by their mere intrinsic economic value. As such,
benefits can possibly slightly contribute to enhance the effectiveness of organizations’
recruitment and retention practices (Longo, 2011a).
In order to avert that the introduction of these arrangements may spell irreparable and
inevitable disasters, when introducing flexible benefits programmes employers should
take particular care with both the specific circumstances and the timing of their
introduction. Putting in place flexible schemes could, for instance, turn to be detrimental
in organizations where the largest part of employees receives the minimum wage or
salary (Furness, 2006). Similarly, it should definitely be avoided the introduction of
flexible benefits plans over Christmas in that traditionally productive of catastrophic
effects. In order to ensure the prompt and timely technical support from the software
provider, should it be required, the introduction of these programmes should also be
averted during the period the other organizations in the same geographical area
habitually introduce these arrangements (Johnson, 2006).
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Hutchinson (2006) suggests that a feasibility study should be better carried out before
designing and implementing a scheme; the main aim of this investigation being to find
out whether this approach is consistent and appropriate for the business and to
determine the most suitable type of programme to be eventually introduced. Ultimately,
the study should essentially aim at gathering the information necessary to identify which
factors can positively and negatively impact the scheme introduction and what savings
can be attained by its introduction and implementation.
The need for flexible benefits very much also depends upon, and is influenced by, the
economic and social models typical of the different areas existing across the globe
(Childs, 2010). In countries where strong social services and state pension provisions
are in place, for instance, the need for flexible benefits approaches may be perceived as
much less important vis-à-vis that of countries where social provisions are scarce and
poor. Yet, according to Childs (2010), in countries like Russia, where life expectancy is
low and the government offers limited health provisions, individuals do show a
considerable interest in health and medical benefits much more than they do in pension
schemes.
Multinational organizations designing and implementing the same arrangements across
the different countries where they are operating are likely to experience miserable failure
in most of the cases. The array of benefits made available to employees clearly needs to
be chosen according to the different geographical social characteristics.
Indeed, not only the social factor, but also the legal framework has its importance and
impact upon flexible benefits plans introduction and needs hence to be duly investigated
at the outset. Businesses operating in countries where national regulations do not
provide tax exceptions or a favourable treatment in favour of the organizations offering
benefits to their employees, and in favour of the employees receiving the benefits
themselves, would clearly find it more difficult to introduce these arrangements and find
a valid and sustainable scope for their introduction.
All of these possible constraints notwithstanding, more recently, flexible benefits
approaches are catching the attention and interest of a constantly growing number of
organizations across a growing number of countries, regardless of their dominant tax
regimes.
What flexible plans, cafeteria benefits and package compensation are
Flexible benefits approaches basically represent reward arrangements giving individuals
the latitude to actively contribute to determine the composition of their own reward
package. The overall reward package value is clearly determined by the employer but,
within the pre-set limits, is the employee him/herself who makes decisions about the
composition of his/her package and defines the balance between cash and benefits
(Torrington et al, 2008).
Armstrong (2009) points out that, once employers have defined the allowance
individuals can spend on benefits, individuals can choose “within benefits or between
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Flexible and voluntary benefits programmes
benefits”. Yet, over time, employees can use their allowance to change benefits, or to
change the value or quota of the benefits they already receive or opt for a combination
of both of these options. Under genuine flexible benefits schemes individuals can hence
either maintain their current salary whilst modifying the combination or level of benefits,
or modify their salary up or down by choosing to receive less or more benefits in kind
(CIPD, 2010).
Approaches to flexible benefits can be either fully flexible or partially flexible. The former
approach gives individuals a wider extent of autonomy in determining and eventually
changing their packages composition at regular intervals. In theory, employees could
renounce to all of the available benefits in exchange for cash or sensibly increase the
value of their benefits in kind in exchange for pay reduction. More often than not,
however, schemes are partially flexible; in these cases employers set an array of core
benefits, which are considered mandatory and cannot hence be “flexed” (Armstrong,
2009), and beside these an additional set of non-core benefits amongst which individuals
have full autonomy to decide whether and in which measure to receive them. Individuals
might, for instance, be subject to a pre-set number of days of holidays a year and to
invest a minimum quota of their salary in the pension scheme, but thanks to cafeteria
programmes they may be completely free to decide whether to benefit from, for instance,
gymnasium membership or private insurance and healthcare provisions (Torrington et al,
2008).
To reduce the administrative burden usually associated with the management of these
programmes, employers could introduce a third method, practically in between the fully
and partially flexible approaches, which can be called “parfully” or “fulltially” flexible.
Parfully or fulltially plans are essentially based on the development of a number of
different pre-set groups of benefits amongst which individuals can choose the one more
closely meeting their wants. However, in this case, each employee can pick the group as
it stands and cannot modify its composition (Longo, 2011a).
In general, offering five to seven groups of benefits should enable employers to meet the
different needs of all of the individuals working within the organizations, but this actually
depends on the size of the business and on the features of its workforce. All of the
identified and designed packages must clearly have exactly the same financial value and
each of them should be developed in order to meet the needs of the different groups or
generations coexisting within the business, do not leaving as far as possible room for
disappointment. This is clearly not a straightforward feat to achieve. A bespoke package
for young couples with children could, for example, be composed by childcare vouchers,
access to corporate or private crèche, playschools or kindergartens, additional holiday’s
entitlement, and so forth. Younger people could, by contrast, possibly prefer additional
cash, whilst elder worker would more likely welcome healthcare insurance and provisions
or to be given the chance to buy additional years of pensionable service in exchange for
a pay reduction (Torrington et al, 2008). Indeed, although these packages could reveal
to be definitely attractive to each individual belonging to the different groups, adding in
each group of benefits something “different”, that is, something which to some extent is
out of the “leitmotiv” of the group composition, could contribute to make a “parfully”
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scheme even more appealing to individuals. If young parents should in fact opt for a
totally child-intended package, they could later feel sorry for not having also access to
something more directly concerned with themselves (Longo, 2011a).
In general, as suggested by the CIPD (2010), even though it clearly depends on the
different local circumstances, amongst the core benefits of a flexible scheme are usually
included: pensions, holidays, life insurance and critical illness or long-term disability
insurance.
“Non-core” benefits can by and large be grouped in three main categories:
Health benefits (e.g. dental insurance);
Financial benefits (e.g. household or holiday insurance);
Leisure, life-style benefits (gymnasium membership, childcare vouchers).
Designing and developing flexible benefits schemes
In order to design and develop consistent and effective flexible benefits schemes reward
managers and professionals need first and foremost to take up a series of crucially
important activities.
The first step of a structured and systematic approach to flexible benefits programmes
development is represented by profiling the whole workforce (Lovewell, 2011). This
activity will surely reveal to be useful both when designing the programme in order to
help reward professionals determining the most appropriate benefits to be included in
the cafeteria benefits catalogue and during the execution phase to help communication
specialists to identify the most effective and suitable communication approach enabling
them to actually catch staff’s attention. On completion of this activity employees will be
grouped according to elements such as the different generations to which these belongs,
common tastes and wants and the possible sub groupings which could further be
identified on the basis of, for instance, individual family circumstances or status, lifestyle,
etc.
When designing a flexible benefits scheme, employers, with the help of reward managers,
also need to determine from the outset the approach they want to adopt towards the
scheme; namely: fully flexible, partially flexible or parfully flexible.
After having performed these activities reward managers have to determine, whether
applicable, which benefits of the proposed package have to be considered as “core”, that
is, which cannot be flexed and which have to be considered “non-core” and can, by
contrast, be the object of individual choice. Once “non-core” benefits have been
identified, the limit to their flexibility or inflexibility also needs to be consequently
determined.
In those cases in which reward managers and employers have deemed the parfully
approach to flexible benefits as the most suitable method for the organization, the next
activity which will need to be performed is that to design and develop, according to the
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findings of the workforce mapping investigation carried out previously, the different
benefits groups or “menus.”
At this stage, employers should also make decisions whether to state in the menus, in
relation to each benefit, the equivalent economic value or otherwise. However, since
publicising the specific cash value of each benefit could make individuals think that they
are actually paying for it, employers may rather consider associating each benefit with a
given number of points (CIPD, 2010). In this way, employees will be able to determine,
asses and compare the value of the overall benefits package they receive on the basis of
the total sum of points associated with their benefits, rather than on the basis of its
financial value. As anticipated in the previous paragraph, regardless of the system in
place, that is, cash- or points-based, the overall value of each package has to be
invariably the same.
Once the scheme has been designed and drawn up, it can finally be introduced to the
employees. It is of paramount importance that the scheme is fully and clearly
understood by the entire workforce. To this extent, an ad hoc communication campaign
is definitely advisable and will surely turn to be both useful and cost-effective. The
employee profiling activity performed during the plan design stage should definitely
reveal useful to help communications specialists to determine the most suitable and
effective communication approach and channels as well.
As suggested by the CIPD (2010), it is also of paramount importance that employees
truly understand the implications of their decisions. In order to enable these to make
and amend their preferences, employers have to put in place methods making it
straightforward for individuals confirming their choices and, eventually, amend them.
Businesses should also give employees detailed and clear information about the number
of occasions in a year these are allowed to propose changes in their benefits package
and about the time limit set to do it. Employees are habitually permitted to propose
changes to the composition of their flexible benefits package once a year. However,
employers can decide, as normally happens, to let individuals modifying their
preferences at any time when particular events occur, for instance: marriage or divorce,
birth or adoption, a relative’s dead, long-term sickness absence, promotions and other
such important similar events (CIPD, 2010).
For the successful implementation of a flexible benefits programme organizations should
not overlook the importance of making appropriate decisions also as for what regards
the format of the benefits catalogue. This type of decision is more specifically concerned
with ident