Reaping the benefits

In the first half of 2007, we carried out a survey of 180 firms regarding the most pressing issues dominating the time of HR teams, and benchmarking the range and level of employee benefits provided. We received responses from 43 firms. These respondents ranged from magic-circle firms to smaller regional practices, providing a diverse demographic from which to draw our findings and conclusions.
It is clear that the vast majority of law firms operating in the UK offer their salaried partners and employees some form of employee benefits package. Over 95 per cent offered what might be considered ‘the big three’ benefits: a pension; a degree of life assurance; and private medical insurance – albeit with significant variations in the level of contributions or benefits being offered. In addition, approximately two-thirds of firms also provided a group income-protection policy for employees.
The average level of minimum employer contribution into a pension scheme was 3.18 per cent, while the average maximum sat at 6.3 per cent. The most popular level of life cover provided was a four-times multiple of salary, presumably influenced by the old HMRC rules applicable prior to April 2006.
Generally speaking these benefits were available to all employees, either immediately or after a short probationary period.
However, there was a significant divergence in the area of private medical insurance (PMI) with less than two-thirds of firms who offered the benefit making it available to all. For the remaining firms, PMI was only available to certain grades of employees.
Taking all the variations into consideration, and ignoring non-statutory holidays, firms are spending approximately ten to 15 per cent of payroll on employee benefits – a considerable investment in their people.
This expense can be attributed to a number of contributory factors: a latent sense of paternalism towards employees; historical legacies from mergers; or a simple case of competitor benchmarking as part of the ubiquitous ‘war for talent’.

Employee attitudes
As a consultancy practice, we work with what might be described as talent-based organisations: law firms, banks, media companies and so forth. Often one of the first tasks we undertake, when engaged by a client, is an employee- attitude survey.
The surveys explore employee sentiment regarding the firm and its work culture in general, as well as people’s knowledge, understanding and, crucially, appreciation of the entire benefits package.
While not universally the case, these surveys often highlight a significant lack of awareness among employees of the range and value of benefits being provided by the firm. Commonly employees are broadly aware that there is a suite of benefits but often have little idea as to the level of contributions (including their own!) being paid into the pension plan, the level of life cover provided and eligibility criteria for other benefits.
Clearly a lack of awareness goes hand-in-hand with a lack of appreciation.
So this can leave firms with a dilemma: is this significant expense really necessary? Does it achieve its goals? Indeed, are there any goals relating to this expense at all?
In essence, the issue revolves around whether to revisit the employee benefits communication programme, reform the range of benefits available to better engage employees, seek ways to control cost or a combination of all these approaches.

Raising awareness
In an interesting move earlier this year, Royal Bank of Scotland announced plans to close its final-salary pension scheme to new employees. Rather than providing new staff with an alternative scheme, new employees were to be given a 15-per-cent salary ‘uplift’ to compensate for not being eligible to join the pension plan.
Furthermore, existing employees were offered 15 per cent of their salary to invest in other savings programmes, if they preferred not to remain in the scheme. RBS argued that the move would give staff “increased choice and flexibility” for their pensions, and claimed that it would cost the firm roughly the same as the current scheme.
Putting the complexities of final-salary schemes and deficits to one side, this was clearly a bold move and, probably for the first time, gave employees a flavour of the costs being borne by the bank.
It is this desire for clarity that underpins the growing popularity of Total Reward Statements (TRS). A TRS provides an employee with a single personalised statement that communicates the overall value of their benefits package, which helps them to understand the total value of their package rather than focusing solely on their salary.
Each element of the reward package is normally assigned a cash value. The advent of online communication media has particularly helped: the ability to provide full information on each of the benefits and to summarise the total benefit to employees in a readily available format is an invaluable tool.
Providing such a statement online opens up many potential new lines of communication to help promote and underline the firm’s commitment to employees. It can also act as a valuable tool when recruiting or retaining employees.
A common challenge for employee engagement with benefits packages is to translate their somewhat abstract nature – associates, in particular, tend to be in that happy age range where death, old age and illness do not appear realistic prospects – into something immediate and tangible. TRS achieves this by translating this intangible into the very tangible medium of cash. Strangely the value of cash seems to be grasped universally across all ages.

Broadening appeal
Interestingly, TRS has also proved a catalyst to consider the introduction of flexible benefit arrangements. In simple terms, flexible benefit schemes typically offer a broad range of potential benefits beyond the traditional package; childcare voucher schemes, critical illness cover, dental plans and bikes-to-work arrangements are typical add-ons.
The introduction of such extra benefits is not ordinarily at the firm’s expense. More commonly, a flex scheme provides a benefits budget (as identified in the TRS) from which the employee can pick and choose the type and level of benefits appropriate.
Consistent feedback from employee-attitude surveys shows that individuals are increasingly interested in tailoring benefits to their personal circumstances. The relative merits of the benefits will fluctuate considerably across age groups, and the ability to pick and choose across a ‘cafeteria’ of benefits has proved popular when implemented and communicated well.
The popularity of such flexible benefits arrangements has, accordingly, grown considerably over recent years. The legal sector has, however, been slower to adopt this approach than other professional services. For instance, our survey showed only 14 per cent of firms offer flexible benefits.

Cost containment
The introduction of such developments is likely to be accompanied by some initial additional expense, further underlining the need to consider all available means of cost containment. Clearly cost containment through reduced benefits will, at the very least, send a rather mixed message to its intended audience.
However, steps can be taken to offset the costs of such engagement exercises. The most common of these is the adoption of ‘salary sacrifice’ as the method of enacting employee contribution and participation.
Under a ‘Salary Sacrifice’ arrangement, an employee voluntarily chooses to take a reduction in their salary in return for a commensurate employer commitment towards their chosen benefits. It is affected through a change in the terms and conditions of employment.
In other words, if an employee is required to pay, for example, three per cent of their salary into the firm’s pension scheme, this can be achieved by taking a reduction in salary of three per cent, which the firm then pays directly into the individual’s arrangement.
There are clearly National Insurance advantages for both employer and employee in this example. In effect, the firm is saving 12.8 per cent National Insurance on the total payroll sacrificed. These savings can then be used to offset the cost of improved communication, a broadened benefits range or simply retained to add to the partnership’s bottom line.
HMRC recognises salary sacrifice and devotes a section of the Employment Income Manual to outlining its expectations of the structure of such arrangements.
Salary sacrifice is not limited to pension schemes and can be applied across a very wide range of benefits.
The degree of National Insurance savings is dependent upon the actual benefits chosen.
Perhaps unsurprisingly, this option has significantly grown in popularity over the years, particularly when used in conjunction with flexible benefits arrangements. Having said this, the practice has yet to be widely adopted within law firms. In our recent survey, just over a third of firms operate their pension scheme on a sacrifice basis.
Although it has proved non-contentious to date, some may have concerns that HMRC may withdraw sacrifice as an option in the future. Interestingly, the ideal opportunity to do this arose when the Tax Avoidance Disclosure regime was extended to cover National Insurance avoidance arrangement this year. HMRC, however, was clear that genuine, properly constructed sacrifice schemes did not fall foul of this development.

Conclusions
Law firms are devoting considerable capital each year to employee benefits. Ordinarily such a sizeable annual investment would be expected to demonstrate a tangible return for the benefit of the firm.
By bringing employee benefits in line with such expectations, it is possible, with some time and imagination, to extract real value from the benefits package, transforming a hygiene factor into a differentiating proposition that sits at the heart of a firm’s culture and brand.

Robin Hames is technical and development director at PIFC Consulting. He can be contacted at robin.hames@pifc.com