Académique Documents
Professionnel Documents
Culture Documents
employees to vary their pay and benefits package in order to satisfy their personal requirements. They are not
the same as voluntary benefits schemes (where employers arrange bulk discounts with external providers) or
net pay schemes (where employees pay for extra benefits), both of which have been used for several years.
Under true flexible benefits schemes, the dividing line between pay and benefits becomes less rigid than in
standard reward packages.
In most schemes, employees are able either to retain their existing salary and simply vary the levels of benefits
within their allowance, or else to adjust their salary up or down by taking fewer or more benefits respectively.
•Employees choose benefits to meet their needs, and value these benefits more highly.
•Employers and employees share the responsibility for providing benefits.
•During periods of change (including merger and acquisitions), flexible benefits can help to
harmonise rewards.
•Employers provide benefits at a known cost that is fixed regardless of the choices that
employees make., so allowing them to cap future benefit costs.
•Employees have a true idea of the full worth of the benefits package they receive and
employers do not provide benefits that are not valued.
•Employees are given a sense of control and involvement by having a choice.
•Dual career couples avoid having benefits duplicated by their respective employers.
•Employers are seen to be more responsive to the needs of an increasingly diverse,
demanding and ageing workforce.
•A competitive benefits package is valuable in attracting and retaining key personnel.
•The awarding of benefits such as company cars becomes less divisive.
•Employers' demands for flexible working practices are more justifiable if employees enjoy
flexible benefits.
•Helps to align the total reward strategy to the HR and business strategies.
•Employers find them complex and expensive to set up and maintain (although new technology
is reducing both the cost and administrative burden).
•The choices made may cause problems both to employers and employees (see below under
'Deciding on the amount of flexibility').
The employee is given a benefit allowance and a list of available benefits. Employees are advised of the
current level of their benefits and 'cost' of buying or selling these to suit their individual needs. There is typically
a limit set on how much of the salary can be used to buy extra benefits and equally there is a baseline of
benefits that must be kept and therefore to the extra salary that can be obtained by selling benefits.
Cash or points?
Some schemes show each of the benefits with a cash value and the employee uses this as the basis for
calculating the effect of changes. The advantage of showing a cash value is that it gives employees an idea of
what the benefit is truly worth and the cost that the employer is bearing. The danger of a cash system is that it
may encourage employees to feel that they are being forced to buy benefits out of their own salary. Other
schemes use a points plan, where each benefit has a points rating and the employee has an allowance of a
certain number of points.
Regardless of whether a points or a cash value scheme is used, all schemes make a clear distinction between
notional salary and the final value of salary that is actually paid in the year (regardless of whether this is higher
or lower than the notional salary). The notional salary continues to be used as the basis for items such as
pension calculations and salary reviews.
When schemes are being introduced, it is important to estimate the likely take-up of specific benefits. This will
enable employers to obtain the most accurate possible quotations for the provision of each benefit. One
problem associated with the introduction of flexible benefits is that the process of making selections actually
changes the profile of the group requiring a particular benefit.
All schemes are costed on the basis of predicted selections; where employees make significantly different
choices, these are regarded as 'adverse selections'. For the success of the scheme, the relative values of the
benefits should be set so as to avoid too many adverse selections. They should also be arranged such that
employees are not encouraged to make imprudent selections that will jeopardise their own security provision.
The inclusion of core benefits guarantees a minimum level of protection. There must be a compromise between
excessive flexibility that encourages inappropriate choices and too narrow a choice that does not meet the
employees' expectations.
Before implementing a flexible benefits scheme organisations may find it worthwhile to survey their employees
as to the type of benefits they favour and value. This would also assist in maximising the value of the package
to both employer and employee.
Once the scheme has been agreed, the choice of benefits is presented to the employees. To ensure a positive
reception, it is important that the choices (and the implications of those choices) are clear. If the options are too
complicated, or the method of making the choices is perceived as being difficult, then employees will simply
default to their existing benefits package and much of the time and money spent in introducing the scheme will
have been wasted.
Many of the computerised systems that are used for administering such schemes include an option that allows
employees to model their own choices. Various selections can be made until the employee is satisfied with the
outcome.
Most schemes allow for changes in benefit selection to be made by a fixed date, once a year. Prior to this date,
employees are sent a personalised document reminding them of their current selection and benefit allowance
for the forthcoming year, and giving them the opportunity to amend the selection. It is important that this
document is simple to use with the costs of the options laid out clearly. If the document is not returned by the
specified date, the benefit package will typically remain at the previous levels or default to a standard package.
Organisations should consider how to deal with those staff who will be off work during the selection period, for
example on maternity leave, on extended holiday or secondment.
Schemes may restrict the amount of change between one year and the next. Typically if there are several
levels of available benefit, employees may only alter benefit by one level at each renewal. In addition, benefits
(such as life assurance) for a spouse or partner may not exceed those for the employee.
Although reviews take place annually, most organisations will allow changes to be made to the selection
outside the normal renewal dates in exceptional circumstances. These typically include:
•marriage or divorce
•birth or adoption of a child
•death of a dependant
•long-term sickness absence
•promotion.
Early schemes were often only for senior employees (because they received more benefits and also
represented a small proportion of the workforce), but this tended to be divisive. Many companies who have
flexible benefits schemes now offer them to all permanent employees. If the wider workforce is to be included in
the scheme, it is important that any pilot should be based on a representative sample of the final spread.
The tax situation for benefits is complex and collection methods vary between organisations. Some benefits
(such as life assurance) attract no tax whereas others are regarded as benefit in kind and are taxed
accordingly. Depending on the arrangements that an employer has made with the Inland Revenue, these
benefits may be taxed at source, through an amended tax code or through the end-of-year P11D. It is important
that the tax implications of any selections are made clear to employees.
The contents of any scheme depend on local circumstances, but core benefits that appear on many schemes
are:
•holidays
•life assurance
•private medical insurance
•critical illness insurance / long-term disability insurance
•personal accident insurance.
The number (and type) of benefits in a scheme is a compromise between offering employees a wide choice
and keeping the administration manageable. According to our latest reward management survey, other than
pensions, the most common benefits that appear in existing schemes include:
Before setting up a new scheme it is advisable to consult employees over what type of benefits they would like
to be offered. All suggestions should be given fair consideration, but care should be taken not to encourage
undue expectations that it will be impossible to meet. By incorporating the views of employees, the scheme is
more likely to receive a positive welcome. Once the scheme is in place, good communication is still essential
so that employees are able to understand fully the benefits offered, and make appropriate choices. For
instance, pharmaceutical firm Astra Zeneca adopted a phased approach when it brought in its flexible benefits
scheme. They began with 'awareness' for six months, followed by 'engagement' for a further three months, and
then 'enrolment' for another three months, with the full embedding of the policy by the end of a year.
As many means as possible should be used to communicate the details of the new scheme. Possible methods
include:
There may be scope for a challenge if the availability and cost to employees of such benefits under a flexible
benefit scheme is dependent on their age.
For more information on the age discrimination legislation, see our factsheet on age issues in the workplace.
CIPD viewpoint
Flexible benefits are a hot topic, fitting in well with the wider total reward debate and talk of the mass
customisation of reward. As a practice, flexible benefits are set to increase as new software becomes available
and the cost of implementation decreases allowing more organisations to set it up. Flexible benefits are seen
as an ideal way of addressing diversity in benefits, as reinforcement of cultural change, harmonisation of
reward practices, especially during merger and acquisition, and an effective means of cost management. But
they are not a 'magic' solution and need to be managed as part of an integrated reward strategy with clear
goals and excellent support processes.
Further reading
CIPD members can use our Advanced Search to find additional library resources on this topic and also use our
online journals collection to view journal articles online. People Management articles are available to
subscribers and CIPD members in the People Management online archive. CIPD books in print can be ordered
from our Bookstore
HUTCHINSON, P. (2008) Flexible benefits: creating competitive advantage. Research into practice. London:
Chartered Institute of Personnel and Development.
Journals
HUTCHINSON, P. (2008) How to implement a flexible benefits scheme. People Management. Vol 14, No 5, 6
March. pp44-45.
This factsheet was originally written by Jean Richards, edited by Clare Hogg, of Helios Associates Ltd and
subsequently updated by CIPD staff.