Shawn Healy is a Senior Tax Manager with The BDO Centre for Family Business, formerly the Stoy Centre for Family Business, which was set up in 1992 dedicated to serving the needs and raising the profile of UK family businesses.
An increasing number of employers are looking at flexible benefits to improve recruitment and retention levels. Is it time your family business became more flexible?
Successful family businesses often have a strong family culture that permeates throughout the business. In these companies the values of the firm are understood both internally and externally and bring major strength to the business. Recent research carried out by London Business School supported by the Institute for Family Business and the BDO Centre for Family Business has corroborated this.
Large family businesses often experience great loyalty from their workforce, indeed some employ relatives of staff as the ownership itself moves down the generations. However, many large family businesses face the same dilemmas as other large companies, often finding it difficult to retain good staff and recruit the right people in an era of relatively full employment.
A Flexible Benefits approach – Flex for short – is not the only answer, but increasingly businesses are examining whether they are right for a family organisation.
Flex – a history
Pay restraints in the 1970s and other developments lead to the emergence of non-cash forms of remuneration – the most common being company cars or some form of permanent medical insurance (PMI) – as part of the overall remuneration package. However, in the majority of cases, non-cash benefits were still offered by employers as additional non-negotiable elements on a business need basis or as a perk.
In the 1980s US employers introduced a degree of flexibility in how employees could receive their remuneration, mainly as the US system already allowed certain flexibility around pension provision. Large UK employers initially imported the concept to improve employee recruitment and retention, and to stand out from the competition.
How does Flex work?
Under Flex, employees are given a degree of control over how and on what their personal remuneration budget is spent.
Employees in a non-Flex environment will talk about their remuneration on a salary, plus pensions, plus benefits. With Flex, each element of the remuneration package is valued (including non-cash elements such as holidays) to form part of the overall budget or total remuneration figure. In this manner employees begin to understand the true value of their remuneration package, which can be a valuable recruitment and retention tool in itself.
It is common for large businesses to offer a full Flex scheme for staff where employees can select from a sometimes very extensive range of benefits and choose the package which most suits their personal lifestyles.
However, Flex is not an all or nothing option. In fact a degree of flexibility can be offered to staff, without any additional cost, or even with reduced costs. Flex can also be introduced on a gradual or selective basis.
Typically, employees will accept a reduction in gross pay in return for receiving the benefits of their choice, which means that you can fund those benefits without necessarily increasing your direct employee costs. Benefits may also be structured so as to minimise tax and NICs.
What's on the menu?
Having decided on a budget the degree of flexibility, and the choices on which an employee may spend their budget are up to you.
You can offer your employees virtually any form of non-cash benefit as part of the scheme. Employers tend to offer a wide range of insurance-based products and include benefits that can offer some form of tax and NIC breaks.
How to choose?
One key advantage a family business has is a good understanding of its culture and beliefs, which can be demonstrated by the type of benefits the business chooses to offer. For example, while the business may not be able to fund the cost of extending existing PMI provision to all employees and their families through Flex, PMI can be offered on terms most employees will find beneficial. There are also a number of initiatives a family business can introduce to cut the cost of commuting, such as minibuses, use of public transport and even bicycles!
We also often find that the owners of family businesses have good communication channels with their workforce. These can be used to good effect as part of the Flex process, involving staff in the benefit selection process, which allows employees to have ownership of the scheme and can be a practical demonstration of the value of working for a family business.
Introducing and running a Flex arrangement
Flex schemes tend to be bespoke by design, but there are some common steps that will need to be taken should you wish to implement a scheme.
Feasibility study. A study is necessary as the introduction of a Flex scheme will fundamentally change the way your staff is paid and how they think about their remuneration. It is also a project that requires considerable management input and resources.
Strategy and design. If Flex is the right way forward, you will need a project team. It should consist of:
- senior staff (decision makers);
- HR, Payroll and IT representation (integrators/administrators);
- external agencies (insurers, actuaries, legal and tax advisers); and
- employees (receivers).
The team will need to grapple with the detailed design of the scheme, looking at issues such as benefit choice, eligibility, administration, pricing policy and integration with existing remuneration policies. The process will also involve an amendment to existing terms and conditions of employment. This generates a number of employment law issues that the team will need to address.
Tax. To receive their chosen non-cash benefits employees are required to forego part of their remuneration budget. This process is commonly referred to as salary sacrifice, and requires professional advice. Formal clearance of the scheme with the Inland Revenue is not a statutory requirement, but it is prudent.
Scheme launch and communication. One of the key issues the project team will address is the communications and launch strategy for the scheme. For many scheme participants this may be their first exposure to non-cash benefits and the practical issue of staff understanding how they will be taxed on the benefits they choose, will require careful communication.
Active participation by employees will only be achieved if they are communicated with from the beginning of the project, culmination of which is a successful scheme launch.
Is Flex right for you?
Survey evidence would suggest that Flex is certainly the current hot topic in the reward arena, but does that necessarily make it right for you family business?
The first thing to remember is that there is not a standard Flex scheme and any scheme should be bespoke and designed to meet your specific needs. That said, you have to be clear about what you are trying to achieve by introducing a scheme and about the message you are sending to your employees. Clarity at the beginning of a Flex project ensures you avoid wasting time and money at a later stage.
It also does not have to be an all or nothing process. Some organisations use the salary sacrifice principle for a single pilot Flex benefit to gauge the views of employees. If this tactic appeals perhaps consider introducing home computers via salary sacrifice, a very tangible benefit that can be implemented by external providers in a short time scale.
Giving employees a degree of choice in how they receive their remuneration can be a valuable way of communicating your business values, while at the same time being a good reward strategy for the business.
The good news is that if you do decide Flex is for you, family businesses are usually much fleeter of foot than their corporate competitors, as they tend to be less hidebound by bureaucracy.
Flex is an issue that all family business owners should at least consider. After all, you have a choice in how you receive your remuneration. Wouldn't your workforce value the same privilege?