How can employers in the UK ensure their remuneration packages remain competitive in a changing employment landscape characterised by rising costs, shifting employee priorities and skills shortages?
A principal concern for employers has always been finding the best way to retain and incentivise key staff. In the wake of COVID-19, with employers facing skills shortages, that concern has increased not only for key staff but also the wider workforce. With many businesses dealing with escalating costs and cash flow difficulties, how can employers ensure that their remuneration packages are competitive?
Here are our top five tips:
1. Changing times
A well-designed remuneration package will incentivise employees to achieve the business objectives and stay with the business. It is important, therefore, to understand what is likely to motivate your employees. In other words, which elements of the package do employees value?
Surveys suggest that, post COVID-19, employees are now just as likely to be worried about their physical and mental wellbeing (and the wellbeing of family members) as they are about their financial security. Also, with many employees having worked from home during the pandemic and coping with additional commitments, employees generally want greater flexibility including additional holiday, the continued ability to work from home and flexible hours.
2. Cash is king
Salary and bonuses will remain the main component of employees' remuneration packages. In the current economic climate, employers need to ensure that the business is getting 'bang for its buck' and that its bonuses are appropriately targeted.
Many employers are moving away from standard basic salaries and standard pay increases based on an employee's grade or length of service. Instead, employers are seeking to develop a more individualised model to try to ensure that the basic salary an employee receives truly reflects that employee's particular experience, skills and contribution to the business.
Employers should review cash bonus plans to ensure that the plan objectives are in line with the current business goals and strategy and the behaviour which the business wants to encourage. Where possible, the plan should be sufficiently flexible to ensure that the top performers receive a bonus.
3. Review your non-cash benefits
Employers should review the benefits they provide to ensure that their offering reflects their employees' changing outlook. There may be some benefits which employees no longer value (e.g. gym membership and season ticket loans) and which employers may therefore want to discontinue and other benefits which employees now consider extremely valuable (e.g. private health and dental care and permanent health insurance) which employers will want to ensure that they offer.
Where possible, employers should seek to provide benefits in a way which makes use of any available tax and NICs exemptions thereby reducing business costs and enhancing the value available to employees.
Only a small number of non-cash benefits can still be provided tax efficiently via a salary sacrifice arrangement, under which employees 'sacrifice' or give up salary in return for the employer providing a non-cash benefit. The benefits that can be provided under these schemes are, however, likely to be highly valued by employees. It is therefore worth reviewing existing arrangements or considering introducing new arrangements. For example:
- Employees concerned about financial security are likely to value increased employer contributions to registered pensions (and enhancements to registered life assurance) together with up to GBP 500 worth of pensions advice per employee per tax year.
- Employees wanting more flexibility may welcome the opportunity to buy additional holiday.
- Employees concerned about commuting on public transport may welcome the opportunity to acquire an electric car or a bicycle to cycle to work.
(See our guide to https://www.lewissilkin.com/en/insights/salary-sacrifice-arrangements#Anchor%205 Salary Sacrifice for more information).
In addition, there are other benefits which, if made to available to employees outside of salary sacrifice and flexible benefits arrangements, may be exempt from income tax and NICs provided certain conditions are satisfied. These include:
Employee Assistance Programme
These programmes give employees access to certain welfare counselling services on a broad range of issues including stress, problems at work, debt problems, alcohol and drug dependency, bereavement, personal relationship difficulties and certain forms of medical counselling (such as cognitive behavioural therapy). Legal, tax or financial advice (other than in relation to debt issues) and advice on leisure or recreation do not qualify for the tax exemption and if an employer wants to provide advice on these areas a separate programme should be established.
Car parking at or near the workplace and workplace charging points for electric or hybrid vehicles: may be worth considering if a number of your employees are using their own transport to commute to work.
Employees are likely to value additional work-related training in these uncertain times. Work-related training is broadly defined and includes a range of skills which an employee might need in their job or to achieve a promotion, although note that the training cannot be provided as a reward for performance.
Trivial non-cash benefits
These are benefits which cost less than GBP 50 per tax year to provide and which are not a reward for performance for example a one-off gift of flowers, food or wine. Given at an appropriate time such gifts may generate a substantial amount of goodwill.
4. Maximising tax advantaged share plans
An employee share plan is widely recognised as a useful way of aligning the interests of senior management with those of shareholders. As with cash bonus plans, it is essential that the performance conditions are in line with current business strategy and objectives.
In addition, a potentially useful way of incentivising the wider workforce with no cash flow disadvantage for the business is via a tax advantaged share plan. Under such a plan, company shares may be made available to employees without any income tax and NICs liability provided certain conditions (relating to the company, the employee, the award and the plan rules) are satisfied.
In summary, there are four types of tax advantaged plan:
Company Share Ownership Plan
Under a Company Share Ownership Plan market value share options may be granted to employees selected at the company's discretion. An employee cannot hold more than GBP 30,000 worth of unexercised options (measured at the time of grant) at any one time.
Save As You Earn Plan
An all-employee plan under which employees are granted share options at a discount of up to 20% of the market value (measured at the time of grant). If employees wish to participate, they are required to enter into a savings contract under which they save between GBP 5 and GBP 500 per month for three or five years out of their net pay. At the end of the period, the savings may either be distributed as cash or used to exercise the option and buy shares.
Share Incentive Plan
This is another all-employee plan under which employees are invited to acquire shares in the company which are held in a special employee benefit trust. Each year, up to GBP 3,600 free shares may be awarded to employees; employees may be given the opportunity to buy up to GBP 1,800 worth of partnership shares and, if they do so, the company may award the employee up to GBP 3,600 matching shares. In addition, dividends paid on these share awards may be reinvested in more shares.
Enterprise Management Incentive Plan
This is aimed at companies with gross assets of no more than GBP 30 million and fewer than the equivalent of 250 full-time employees. Under this plan employees selected by the company may hold unexercised options over shares worth up to GBP 250,000 (measured at the date of grant). The company cannot grant options over more than GBP 3,500,000 worth of shares at any one time.
Don't underestimate the importance of employee communications and the time it takes to get the communications right. Clear, simple and transparent employee communications are essential. A really good remuneration package is of little value if employees don't understand what is on offer, the goals that they are required to achieve and the difference it makes to their pay packet.
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.