Staff scramble to get pay linked to profits

NEARLY one in 10 employees in the private sector has a pay deal linked to profits.

In the last three months of 1993, the number of those covered by profit-related pay (PRP) schemes grew by 28 per cent to just over 1.5 million.

The attractions of PRP are obvious. Although the Chancellor Kenneth Clarke stamped out some perceived abuses associated with the schemes, he did not touch the tax relief available on PRP.

It continues to be tax free up to the lower of 20 per cent of pay or pounds 4,000; this means that those with a marginal income tax rate of 25 per cent could save up to pounds 1,000 by receiving a part of their pay as PRP, and a higher-rate taxpayer could save up to pounds 1,600.

In 1984 Professor Martin Weitzman, a US economist, argued that if an element of employees' pay is variable it will help to drive down unemployment and expand production. Employees will feel the financial effect of both good and bad years and therefore become more focused on a company's profitability.

The idea was enthusiastically received - the Wall Street Journal hailed it as 'the best idea since Keynes' - and within three years, in 1987, it was introduced into the UK as PRP.

The concept has since become hugely successful over here, as companies such as Boots, Halifax Building Society and John Lewis Partnership have either persuaded their employees to swap a proportion of their basic pay into PRP, or delivered a pay rise using PRP, or used the scheme as a bonus.

By exploiting the tax relief available on PRP, companies can provide substantial salary increases to their employees.

For example, someone whose current pay is pounds 20,000 and who agrees to replace pounds 4,000 with PRP could receive an annual increase in net pay of pounds 1,000 or 7 per cent, which is equivalent to a pay rise of 7.7 per cent. These figures are too interesting to ignore in these current, low-inflation times.

The continued support given by the Government to the concept of PRP and the help the Inland Revenue gives accountants in designing schemes means that PRP is very much alive and kicking. However, thought needs to be given to how PRP is integrated into employee reward strategies.

The accountants have made no secret of the fact that PRP has generated a steady flow of work over the past few years. In fact, the accountants have practised what they preach. Arthur Andersen was the first firm of accountants to introduce a PRP scheme for its own staff in September 1991.

PRP has since been a runaway success, both with its employees and with its clients. Arthur Andersen employees were asked to swap part of their salaries into PRP. Each month a proportion of PRP is paid 'on account', with a final payment of the outstanding PRP earned during the year after the firm's year end.

Faith Jenner, director of personnel at Arthur Andersen, said: 'We had a tremendous take-up from employees when the scheme was introduced - more than 98 per cent decided to join the scheme. We are now into our third year of running the scheme and employees are able to enjoy the benefits of the scheme both on a month-by- month basis and in their final PRP payment, which is paid just in time for Christmas.'

Since then the firm has introduced hundreds of PRP schemes into companies, ranging from those employing thousands of employees to small family businesses.

Brian Friedman is a partner in the Employee Benefits practice at Arthur Andersen.

voicesGood for Lana Del Rey for helping kill that myth, writes Grace Dent
The University of California study monitored the reaction of 36 dogs
sciencePets' range of emotions revealed
Life and Style
fashion Designs are part of feminist art project by a British student
Arts and Entertainment
The nomination of 'The Wake' by Paul Kingsnorth has caused a stir
Arts and Entertainment
The Tour de France peloton rides over a bridge on the Grinton Moor, Yorkshire, earlier this month
Snoop Dogg pictured at The Hollywood Reporter Nominees' Night in February, 2013
people... says Snoop Dogg
Life and Style
food + drinkZebra meat is exotic and lean - but does it taste good?
Arts and Entertainment
Residents of Derby Road in Southampton oppose filming of Channel 4 documentary Immigration Street in their community
voicesSiobhan Norton on why she eventually changed her mind
ebookA unique anthology of reporting and analysis of a crucial period of history
Scottish singer Susan Boyle will perform at the Commonwealth Games opening ceremony in Glasgow
commonwealth games
Arts and Entertainment
Dwayne 'The Rock' Johnson stars in Hercules
filmReview: The Rock is a muscular Davy Crockett in this preposterous film, says Geoffrey Macnab
Life and Style
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

PMO Analyst - London - Banking - £350 - £400

£350 - £400 per day: Orgtel: PMO Analyst - Banking - London - £350 -£400 per d...

Cost Reporting-MI Packs-Edinburgh-Bank-£350/day

£300 - £350 per day + competitive: Orgtel: Cost Reporting Manager - MI Packs -...

Insight Analyst – Permanent – Up to £40k – North London

£35000 - £40000 Per Annum plus 23 days holiday and pension scheme: Clearwater ...

Test Lead - London - Investment Banking

£475 - £525 per day: Orgtel: Test Lead, London, Investment Banking, Technical ...

Day In a Page

Screwing your way to the top? Good for Lana Del Rey for helping kill that myth

Screwing your way to the top?

Good for Lana Del Rey for helping kill that myth, says Grace Dent
Climate change threatens to make the antarctic fur seal extinct

Take a good look while you can

How climate change could wipe out this seal
Man Booker Prize 2014 longlist: Crowdfunded novel nominated for first time

Crowdfunded novel nominated for Booker Prize

Paul Kingsnorth's 'The Wake' is in contention for the prestigious award
Tour de France effect brings Hollywood blockbusters to Yorkshire

Tour de France effect brings Hollywood blockbusters to Yorkshire

A $25m thriller starring Sam Worthington to be made in God's Own Country
Noel Fielding's 'Luxury Comedy': A land of the outright bizarre

Noel Fielding's 'Luxury Comedy'

A land of the outright bizarre
What are the worst 'Word Crimes'?

What are the worst 'Word Crimes'?

‘Weird Al’ Yankovic's latest video is an ode to good grammar. But what do The Independent’s experts think he’s missed out?
Can Secret Cinema sell 80,000 'Back to the Future' tickets?

The worst kept secret in cinema

A cult movie event aims to immerse audiences of 80,000 in ‘Back to the Future’. But has it lost its magic?
Facebook: The new hatched, matched and dispatched

The new hatched, matched and dispatched

Family events used to be marked in the personal columns. But now Facebook has usurped the ‘Births, Deaths and Marriages’ announcements
Why do we have blood types?

Are you my type?

All of us have one but probably never wondered why. Yet even now, a century after blood types were discovered, it’s a matter of debate what they’re for
Honesty box hotels: You decide how much you pay

Honesty box hotels

Five hotels in Paris now allow guests to pay only what they think their stay was worth. It seems fraught with financial risk, but the honesty policy has its benefit
Commonwealth Games 2014: Why weight of pressure rests easy on Michael Jamieson’s shoulders

Michael Jamieson: Why weight of pressure rests easy on his shoulders

The Scottish swimmer is ready for ‘the biggest race of my life’ at the Commonwealth Games
Some are reformed drug addicts. Some are single mums. All are on benefits. But now these so-called 'scroungers’ are fighting back

The 'scroungers’ fight back

The welfare claimants battling to alter stereotypes
Amazing video shows Nasa 'flame extinguishment experiment' in action

Fireballs in space

Amazing video shows Nasa's 'flame extinguishment experiment' in action
A Bible for billionaires

A Bible for billionaires

Find out why America's richest men are reading John Brookes
Paranoid parenting is on the rise - and our children are suffering because of it

Paranoid parenting is on the rise

And our children are suffering because of it