Maximising the value of employee reward works two ways

There are two ways to maximise the value of an organisation’s reward programmes; you can:

• increase the perceived value in the eyes of the recipients or,
• reduce the costs of the programmes.

These are not mutually exclusive; far from it, they may well work best in tandem. For example, if you are making savings in some parts of your reward programmes then ensure that people in the organisation recognise the true value of other parts.

A recent YouGov survey found that 76% of employees did not understand their benefits package. A company survey I ran a few years ago found that 32% of people thought they had no long-term disability cover and 24% thought they had no life cover. In fact they all had both and the cost of providing these benefits to the people who did not know they had them was a little under £1m a year. In cases like these, ensuring that people understand the value of some of the rewards that they are getting can help offset the impact of reductions elsewhere.

This is particularly true at this time of financial difficulties. Whilst the emphasis quite naturally is on saving costs, many organisations seem to do little to ensure the value of those things not being changed are understood and value appropriately.

I believe that you should always explain the value in terms of what it would cost an employee to replace where appropriate. The best example is group private medical insurance (PMI). When the company pays the premium, the tax (P11D) cost to the employee can be as little as 10% of what it would cost them to provide PMI for themselves and probably for worse cover. A similar example is defined benefit pensions. There is really no point emphasising the contribution that the employer pays as a percentage of salary. This is somewhat irrelevant. Much better to use the cost of one year’s accrual. This is the effective cost of providing the future pension, which ultimately must be paid for and is equivalent to what they would have had to put away for themselves.

Flexible Benefits plans, which can now be introduced cost effectively even to small organisations, require employees to engage with the system even if they don’t change anything. This can be an important part of helping communicate the value.

When considering where you might want to make savings, you need to understand what parts of your reward programme people value the most and the least. It makes little sense to cut the most valued elements if you could cut the least valued. But to make this decision you do need to have asked!

But some savings can be made with no negative impact on employees. For example by using existing tax effective plans like salary sacrifice, or changing an insured medical plan to a trust to save the IPT. Perhaps you could deliver value using an approved share plan rather than salary. It is always worth looking at these sorts of savings first.

But always take a balanced view. If you think about making cuts, also think about maximising value elsewhere. 

1 Employee Benefits, July 2007