UK: Delivering The Right Package

Last Updated: 17 November 2011
Article by David Ellis

How do you retain and incentivise short-term employees? How do you secure the loyalty of the people vital to your continued growth? And how can you tie your wage bill more closely to your profits? These are some of the main employment issues facing the licensed trade. David Ellis, employment solutions partner at BDO Stoy Hayward, has some answers.

There is a lot of part-time working in the licensed trade, but what really distinguishes the sector is its short-term employee population. People don't tend to stay in one job very long – they move on or they are poached by other chains. After all, this is a very visible sector – you can walk into another pub and compare notes with your opposite number. Because of the transience of a large part of the workforce, businesses in the licensed trade need to adopt an original approach to retaining and incentivising short-term employees. But they also need to find ways of securing the loyalty of people higher up the organisation whose long-term contribution is vital.

At the same time, the sector has significant fixed costs but highly volatile profits – a spell of poor weather can wreak havoc. How can you make your wage bill flex with your profits? Although this is a fairly traditional industry, it has a lot to gain from embracing modern ways of paying people – and here are possible solutions to the three key issues:

Incentives For Short-Term Employees

Working in the licensed trade offers a particular lifestyle and often attracts a certain kind of person – so you need to provide a benefits package that appeals specifically to them. "Traditional benefits such as pensions and medical insurance are unlikely to fit the bill – people want something more immediate and tangible," says BDO Stoy Hayward partner David Ellis. "A modern package that sends the right message could include a choice of flexible benefits such as additional holiday days, discounted gym membership or vouchers for a popular national retail chain – not forgetting in-house discounts."

Ideally, you should be looking at schemes that offer attractive benefits while saving money for your business. More and more businesses are introducing salary sacrifice schemes to provide employees with items such as home computers, mobile phones and bicycles cheaply. "The tax breaks on such items make the schemes attractive to both employer and employee alike," says David. "For example, offering a scheme that allows a 33 per cent saving on employees mobile phone bills would be popular as virtually all employees will have one, and, importantly, there are no employer's national insurance contributions (NICs) to pay on the part of the salary used. Where a benefit is free of both income tax and employer's NICs, you're onto a winner."

An Equity Share To Secure Long-Term Commitment

For those people on whom the long-term success of the business depends, your must-keep employees, you might want to go further and offer them an equity share. The key is to do it as tax efficiently as possible and that means using an approved share option scheme. The two most common are the enterprise management incentive (EMI) scheme, available to businesses with gross assets up to Ł30m and the company share option plan (CSOP), available irrespective of your size. Both schemes enable you to restrict who you give share options to – so you can focus on those employees with the potential to play a significant role in the company's growth.

These schemes are a vehicle for giving employees the option to buy shares at a predetermined preferential price at some point in the future. There is usually no income tax or NICs to pay when the options are exercised. Although the employee must pay capital gains tax (CGT) on the profit when he or she sells the shares, taper relief means CGT could be as low as 10 per cent just two years after grant. Importantly, the company is entitled to a statutory corporation tax deduction on the profit when the employee exercises.

David adds: "As a way of encouraging employees to stick around, you could grant share options with some kind of time-based vesting – or state that they can only be exercised if the employee's business unit, or the company as a whole, achieves specified targets."

Relating Pay To Profits

For both short and long-term employees, you could consider some kind of profit-related pay mechanism, where the benefit comes out of additional revenue. This could go some way to balancing out your revenue and costs. For short-term staff, such a payment is likely to be linked to a specific promotion in their own outlet; for example, successfully meeting targets for additional food sales. For people higher up the organisation, the payment might be linked to performance by their region or business unit, or the business as a whole. But David adds: "If such a scheme is to be an effective incentive, it is vital that the employees concerned can see how their individual contribution can make a difference to the target that has been set – otherwise they are unlikely to get behind it."

An annual bonus plan where a portion of salary is dependent on performance, by the individual and/or the business, can take significant pressure off the wage bill. But it is difficult to move to such a model overnight. Why should people buy into a scheme if all they can see is the potential for their salary to fall? Instead of inspiring loyalty, it could well have the opposite effect. "One possibility is to introduce a bonus element in lieu of salary increases," says David, "thereby eliminating any additional cost to the business while limiting any negative sentiment." A short-term employee population and potentially volatile profits are inescapable characteristics of the licensed trade. But there is certainly scope for structuring remuneration in a way that is advantageous to your business financially – while also giving you the edge in the recruitment and retention stakes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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