Accountancy & Management: Flexible packages offer richer range of benefits: A growing number of companies are abandoning traditional forms of non-cash payment and offering alternatives

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The Independent Online
RECRUITMENT advertisements have changed considerably in recent years. Where they used to carry just an indication of the salary the successful job applicant might expect, they are now likely to read: '60k package' or perhaps '40k plus benefits'.

Certainly senior executives now receive a lot more than the old big salary and big car. And if their more lowly colleagues do not share in the stock options, bonuses and the like, they have a good chance of getting subsidised loans, pension contributions and health care as part of their overall remuneration packages.

What began as a piecemeal effort to compensate valued staff at times of pay freezes or high taxation has become the norm.

The only problem, according to Carol Arrowsmith, managing director of New Bridge Street Consultants, is that there is still no rational basis for deciding who gets what, and there is little idea of the true value of different benefits.

This is one of the factors behind the growing move towards flexible benefits packages. Even if a company does not eventually go down this road, it is 'a very good exercise' to examine what it is doing and what it is funding, Ms Arrowsmith said.

A further advantage, according to Alastair Watson, the head of actuarial and benefit consulting at the actuaries and consultants the Wyatt Company, is that employees can learn the value of what they are receiving.

The advantage of this is that complaints about pay differentials can be resolved by looking at the total package and making adjustments to its components if necessary.

But perhaps the greatest effect on the translation to the UK of a concept already popular in Australia and the United States is tax. While benefits have traditionally been treated neutrally in those countries, they have been subject to different charges in this country; only recently has that changed, with regard to company cars in particular.

Having access to a gleaming foreign car without having to worry about the costs of its upkeep is still enticing to many people. But there is growing evidence that many will forsake the BMW or Golf GTi if they can receive the value of that benefit in some other way, rather than just lose it.

The principle of being able to choose from a menu of items and perhaps have the balance of a package as cash is particularly attractive to the increasing number of women executives, Elizabeth Hubbick, remuneration and benefits specialist at the actuaries and consultants Bacon & Woodrow, said.

Many packages are being determined by well-meaning middle-aged men who include benefits that are attractive to them. But they may have little or no relevance to women, she said.

For example, for a divorced woman in her thirties or forties, child care may be the most important issue. Any help that her employer may be able to provide by means of childcare vouchers or flexible working hours is likely to be much more valuable than other benefits, such as a car.

In addition, many older working women need help with funding their retirement because they have either had large gaps in their careers or are recently divorced and have previously relied on their ex-husbands' pension provisions.

Furthermore, employees' priorities may change over the course of their careers. The young man or woman who puts great store by a fast car may later prefer to have a model more suited to a family or even something totally different, such as extra healthcare protection or enhanced pension provision.

It all comes down to looking at people as individuals and the way they value their package, Ms Hubbick said. 'Benefits are only a benefit if they are of value to you.'

She cites the increasingly common situation where both husband and wife are in professional positions, with high salaries and extensive benefits. If, for example, both employers provide family health cover it is only really a cost benefit for one member of the couple.

But the other will be reluctant to give it up on the grounds that they will feel worse off by not receiving what is their due. This is not likely to be the case, however, if they can opt for something else.

Once a company has accepted the principle, it can either go over to total flexibility or offer it on a selection of items. Much will depend on the philosophy of the company: whether it has a paternalistic view that certain benefits, such as pensions, should be central to any package.

There is also the argument that offering extensive flexibility can lead to administrative problems. Wyatt and others claim to have overcome this through computer software programs. But Ms Hubbick suggested that this is not really the difficulty that it is made out to be. The time and work required to tailor a benefits package to an individual are little different from that often devoted to deciding between models of cars, she said.

While Ms Arrowsmith believes that interest in the concept is still at the 'dipping the toe into the water' stage, Ms Hubbick sees increasing acceptance of it, not least from the Government. 'Quite a lot of companies offer flexibility to individuals. It's creeping in from the top downwards,' she said, adding that the Government was taking steps towards removing barriers to it.

One of the barriers that observers point to is the precedent created by the 1970 taxation case of Heaton v Bell. It relates to an employee who was allowed by his employer to switch between taking a car and receiving extra cash at very short notice.

This was before the introduction of scales for the taxation of company cars, and the Inland Revenue deemed that the employee should be taxed on the value of the cash.

This problem can be avoided through careful structuring of packages, and Ms Hubbick is confident that it will be overruled by legislation soon.

Nevertheless, even Wyatt - with its faith in its simple software package - does not see widespread use of total flexibility. While looking at the whole of an employee's remuneration allows for such ideas as the 'selling' or 'buying' of holidays, it accepts that interest is likely to be confined to certain elements.

Even leaving aside such issues as whether employees should be encouraged to take less holiday, there can be abuse, Mr Watson said. An employee could, for instance, sell most of his holiday and then take a lot of sick leave.

Ms Arrowsmith said: 'By and large, it's a wonderful idea. But like most things in life, it's much more wonderful in theory than in practice.' She pointed out that some benefits packages will lend themselves to this treatment more than others. If - as is sometimes the case - a company offers first-class benefits in every area there is little incentive to choose between them.

(Photograph omitted)