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HR Best Practices
HR Best Practices

Compensation & Benefits

Through our daily work with over 1300 organisations, we see many examples of innovative thinking in HR. In this series of 14 best practices we define true “best practices” in HR nowadays. In this thirteenth case study of this series we will focus on Compensation and Benefits with several examples of Top Employers within the Technology-, Energy-, Automotive- and Consumer Goods Industry.

For Top Employers, compensation policies are becoming more formalised, and the principles that underline them are being made more transparent to meet the changing expectations and needs of employees, who often want to be rewarded in different ways than they were in the past.

Compensation and Benefits in the Technology Industry

For more than 15 years, this Top Employer (Europe, 300 employees) has operated a flexible approach to benefits management but this flexibility was limited and not supported by online tools. The purpose of the company’s new approach (which was introduced in 2016-2017) was to offer more flexibility for employees to adapt and optimise their benefits package to their own needs, while at the same time, cutting down on the administrative burden for HR by providing a self-service solution for employees. To support this aim, the firm implemented a Cloud Solution provided by KPMG and customised the tool to its specific needs.

Here, employees can use their “budget”, or additional compensation by making financial decisions like downgrading their car or selling unused holiday days or using ‘flex points’ (part of their compensation package that, if not used, can be paid back as a normal bonus). They can also spend their “budget” and purchase holidays, buy extra-legal child allowance, order a car (using total cost of mobility instead of leasing price), order a bike or scooter and more. They can also use their ‘flex points’ to pay motorway tolls and fuel during holidays abroad, enrol in education programmes or pay for IT and car repairs.

This online tool generates and archives all the contractual documents and insurance for fiscal compliance purposes, and this data is fed into the payroll system. As a result of this online tool, employees appear to value the flexibility offered, even if the tool is not used by more than 30% of the employees (except for some specific benefits like child allowance and motorway toll payment via ‘flex’ points).

This flexible approach also seems to be very attractive to job candidates. In 2017, the firm managed to get its full headcount on board before June and it believes the flexible benefits offer had a real impact, even if the firm cannot measure that specific impact. There is no precise constraint/limitation to this practice as the cost of implementation is not high. Companies considering this kind of approach will, however, need to ensure compliance with local tax and labour laws, which requires collaboration with tax experts and lawyers during the implementation phase.

Compensation and Benefits in the Energy Industry 

This energy engineering company (Europe, 38,000 employees) has introduced a new way for employees to understand how their compensation package is calculated. In the past, the company found that its people managers lacked the technical knowledge to be able to properly explain the different compensation elements to their team members. So, this responsibility was transferred to the Compensation and Benefits team.

Now, employees can call a telephone line if they have any questions about their salary package or regarding their updated salaries after their annual compensation review. Naturally, managers still play an important role in the compensation calculations via their input into the performance management/potential discussions; however, managers appreciate the fact that they no longer have the “weight on their shoulders” of having to explain the rewards package to their team members. Since the new approach was introduced, confidence in the entire compensation process appears to be higher, as their employees feel confident that their salaries are being managed fairly and consistently by the experts within the company.

According to the firm’s employee engagement survey results, scores have risen by 5% regarding where employees are asked to rate how fairly their salary is calculated. This appears to be a good practice for companies willing to make the additional resourcing investment needed to beef up their Compensation and Benefits teams.

Compensation and Benefits in the Automotive Industry

This Top Employer (Europe, 300 employees) found out via its employee feedback channels that many staff would prefer to receive their annual salaries in 12 equal monthly payments, rather than getting a “13th cheque” in June and December. Workers reported that it would be easier to pay monthly bills by having a fixed salary payment each month. As a result of this feedback, the company offered all its team members the option to move to a 12-month salary structure or to keep the existing arrangement.

The employer has not measured the impact of this change, but anecdotal feedback suggests the workers are very satisfied with the possibility to choose how they prefer to have their salary paid.

This is a best practice that can work in many European countries where the “13th cheque” remains prominent. However, changing lifestyles especially among younger workers, mean that the concept of an extra payment in June and December is often seen as outdated. The only barrier to companies considering this change is the additional administrative costs that may be incurred, as well as the need to ensure compliance with local tax and labour laws. 

Compensation and Benefits in the Consumer Goods Industry

This UK-based Top Employer (Europe, 600 employees) offers its employees the ability to buy benefits across a range of different categories using their salary and get a tax benefit. Buying these benefits using salary sacrifice is a simple way for employees to make tax and/or National Insurance savings. Employees can select the flexible benefits they would like to pay for out of their salary – resulting in an increase in their take-home salary amount.

The tax-deductible benefits offered to the employees are cover a wide range of options. Travel insurance, critical illness cover, will writing and home emergency cover are among the options. Employees can choose health options including health screening, dental insurance and gym membership, or they can purchase childcare vouchers, restaurant vouchers or even wine. The benefits programme has been established for a few years, and results have been encouraging. A key success factor is that the benefits cover many areas of interest, so there is something for everyone. In addition to this, the tax savings for employees can be significant. Under UK tax law, if you are a basic rate taxpayer you can save tax at a rate of 20% on salary sacrificed for some of these benefits. The potential savings for top-rate taxpayers are even higher.

For Top Employees considering setting up a similar programme, the only constraints will be local tax laws, which may differ in terms of which taxable benefits can be paid for out of your salary, as well as the (administrative) costs involved in setting up and maintaining such a programme.

Our Conclusion

For too long, Compensation and Benefit has been the “black box” of HR; using complicated methodologies managers and employees barely understand therefore making it extremely difficult for HR to explain to stakeholders. With the demand for transparency in the current workplace, as well as changing needs and preferences (especially among younger generations), Top Employers are starting to evolve their compensation models. As a result, we are seeing the link between performance and reward become more distinct and we are seeing more differentiation between top performers and low performers, as well as better communication of how salaries and bonuses are calculated. 

We now also observe a greater focus on indirect benefits. It appears that once base salaries are set at a level high enough that employees feel properly rewarded for their contributions to business success, indirect benefits such as cars and gym memberships become a powerful extra motivator and a tool to drive employee retention. A lot of work remains to be done in this area and we will continue to monitor the trends throughout the rest of 2018!

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Curious about the previous topic we've discussed in this series of case studies? Gain more insights on Workforce Planning and Organisational Redesign.