Pay and Reward

Forecast

Benefits

Pay rates

Policy

Warmer climates

A nice package

What a performance

Perfect partnership?

Is this the year that company pay

How can employers use reward budgets

Performance-related pay isn’t all it’s

Norman Lamb and Graeme Nuttall

freezes are forced to melt? | Page 5

to keep staff motivated | Page 8

cracked up to be | Page 11

review employee ownership | Page 13

business-reporter.co.uk

Distributed within The Sunday Telegraph, produced and published by Lyonsdown which takes sole responsibility for the contents

Because they’re worth it?

The market for CEOs is not the competitive snake pit many would have us believe See page 9

A CLEAR VIEW FOR ENGAGEMENT

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0800 0718 222 | www.alexanderforbes.co.uk/YourMoneyView | enquiries@aforbes.co.uk Alexander Forbes Consultants & Actuaries Limited | Leon House, 233 High Street, Croydon, Surrey CR9 9AF | Tel: +44 20 8686 0660 | Fax: +44 20 8681 4093 | www.alexanderforbes.co.uk | Authorised and regulated by the Financial Services Authority | FSA Reference: 120975 | Registered in England and Wales at Ground Floor, Abacus House, 33 Gutter Lane, London EC2V 8AS | Company Number: 1804276

Business Reporter 路 April 2012

an independent report from lyonsdown, distributed with the sunday telegraph

Business Reporter · April 2012

an independent report from lyonsdown, distributed with the sunday telegraph

Pay and reward

3

How low can you go?

After several years of low or no pay rises, employers are coming under pressure to offer more. Now is the time to rethink your reward strategy

By Lucie Carrington

Publisher Bradley Scheffer brad@lyonsdown.co.uk Editor Lucie Carrington lucie@lyonsdown.co.uk Sub Editor Amy Dickson amy@lyonsdown.co.uk Production Assistant Fleur Hollett fleur@lyonsdown.co.uk Project Manager Tom Turnbull tom@lyonsdown.co.uk For more information on any of our supplements please contact us: Telephone 020 8349 4363 Email info@lyonsdown.co.uk Online www.lyonsdown.co.uk

business-reporter.co.uk

Supporters

The recession played havoc with employers’ carefully crafted reward schemes. Many organisations were forced to impose pay cuts and freezes and reduce working hours.

Add to this rising inflation through 2010 and 2011 and the result last year was a 3.5 per cent drop in household earnings. According to the Institute of Fiscal Studies, the UK is experiencing the biggest drop in living standards for 30 years.

Employers should be concerned because this year they are likely to come under pressure to do something more. Figures from the Chartered Institute of Personnel and Development earlier this year showed that only 9 per cent of private sector employers planned a pay

3.5% drop in household earnings last year

freeze in 2012 and 35 per cent intended to put pay up. A further 55 per cent had yet to decide.

There is little sign that employers will have more money to spend on higher pay.

The government is predicting that the economy will grow by a meagre 0.8 per cent this year and the Euro crisis could throw those figures, as it did last year.

Business Reporter argues that it is therefore high time businesses started looking at pay and reward systems in the round. The biggest mistake senior managers often make when dealing with employee reward is the belief that it’s just a technical HR issue. It isn’t. As several of the articles in this supplement show, how you reward people – and who you reward – is central to any talent plan and should be a boardroom issue.

Reward is about much more than the pay cheque at the end of the month. As Nick Martindale shows on p8, employers could be managing their pay bill far more creatively to engage and motivate their people.

We also take the opportunity to explode some of the myths around pay. Stephen Overell takes a look at the global market for chief executives (page 9), which boards use as an excuse for hiking up their CEO’s pay. But does it really exist for most firms?

Meanwhile, don’t make the mistake of thinking your sales team are only interested in cash. They are the men and women who will (or perhaps won’t) keep the business going through the downturn but, as Marc Beishon writes (page 9), the

9%

Up or down?

What will happen to pay rates this year? Nick Martindale examines the data p5

Hooking the big one

Try fishing closer to home for your next CEO. Most of your competitors are, says Stephen Overell p8

of private sector firms freezing pay evidence suggests that like many of us they want to feel valued as much as rewarded.

We also dig deeper into the government’s call for localised public sector pay (p11). The private sector should be wary of buying into the idea that a public sector pay premium is preventing them from competing for the best people.

But what shines out in all our articles, both through the businesses we have interviewed and the data we are quoting, is the issue of fairness in reward. Of course, we’d all like to earn an extra few hundred quid each month but most of all, it seems we want to feel that we have been rewarded fairly – whether that is related to individual performance, the success of the organisation, or the market. It is by ensuring their people feel fairly paid that firms will get the extra effort at a time when it really counts.

The big sell

Even salesmen just want to be loved, says Marc Beishon p9

Premium rates

Are public sector pay rates crowding you out? Lucie Carrington looks at the evidence p11

Contributors Lucie Carrington has edited a wide variety of business magazines covering management, health and public policy.

She has also written for the Daily Mail, The Guardian and The Daily Telegraph on business and consumer issues. Lucie is managing editor of Lyonsdown.

Nick Martindale is a business journalist who writes for national media and trade titles. He is a former editor of New Business magazine, a quarterly magazine for entrepreneurs.

Stephen Overell is a journalist and commentator on work and labour market affairs. He is the author of Inwardness: The Rise of Meaningful Work, and Losing Control Again? Power and the Quality of Working Life.

Marc Beishon is a business journalist covering IT and telecoms, sales and marketing, healthcare and general business for corporate audiences and consumers. Marc has worked on IT and healthcare magazines and on New Scientist.

Business Reporter · April 2012

4

an independent report from lyonsdown, distributed with the sunday telegraph

Industry view

Executive pay – the insider’s view Rewarding good performance is essential, but conflict over executive pay could derail the chance to make the system more open and fairer for all Everyone agrees that something must be done about executive pay, but the debate is often long on outrage and short on answers. To move forward, we need clarity on what the problems really are – and on which reforms could make a real difference.

There are four areas of significant concern – pay quantum, disclosure, annual bonuses and one size fits all.

First, pay quantum. Pay growth between 1997 and 2007 was unsustainable as incentive opportunities doubled or trebled, while salaries significantly outstripped inflation.

However, significant growth is unlikely in the near future – following the financial crisis, remuneration committees, investors, executives and advisers all realised that a watershed had been reached. Since 2009, executive salary increases have been the same as or less than those for other staff, and incentive opportunities have stabilised. And more thoughtful remuneration committees are now actively considering how pay compares internally as well as externally – using more sophisticated approaches than the crude ratio of top to bottom pay favoured by politicians.

In this context, the proposed binding vote on pay policy could prevent growing, high performing and truly global businesses from making necessary adjustments to pay.

Second, the introduction of pay disclosure led

What’s the best way to reward executives?

to a clean-up of bad practices and helped investors to hold companies to account. And although disclosure has contributed to pay inflation,

experience abroad suggests pay may have risen more without it.

Proposed enhanced disclosure requirements may help in part. However, too much disclosure is already focused on regulatory requirements.

The real need is for remuneration committees to offer honest, plain-English explanations of the challenges faced, the decisions taken and the thinking behind those decisions.

Third, bonuses have fallen into disrepute. In executive pay, zero bonuses are rare and bonus payments seem to increase more when profits are up than decrease when profits are down. To the outside world, the system looks rigged.

The problem in part reflects too much focus on the company’s annual budget, when for many businesses the external economic cycle has a huge impact on financial performance.

Companies should therefore reward against forward-looking lead indicators and the activities that will underpin sustainability and future value creation. Financial performance may be used as a secondary multiplier to ensure affordability.

Finally, the idea that one-size-fits all. By 2008, an obsession with comparison and a box-ticking culture among investors meant that around 70 per cent of major UK companies had very similar incentive structures. This uniformity ignored huge differences in time horizon, maturity, cyclicality and strategy between companies.

Today, the picture is changing with investors and remuneration committees realising a more tailored approach will deliver more appropriate pay outcomes and better motivated executives.

The answer to these four issues is not regulation. At best, scrambling to achieve compliance will be a distraction and at worst, there will be unintended consequences.

For example, capping termination payments will cause newly appointed executives to negotiate for bigger packages. The binding vote on future policy will make it harder for listed companies to compete for talent with overseas companies, private equity and advisory firms. And although simplification sounds appealing, much of today’s complexity arose to prevent windfall gains to executives from earlier, simpler structures.

Remuneration committee members are business people. When they look at executive pay from the perspective of the business, its strategy, culture and people they tend to reach the right conclusions. If boards tear up the benchmarking studies and see regulation as a secondary rather than primary issue, pay may just start to make sense again.

Peter Boreham is head of UK executive remuneration at Hay Group 020 7856 7220 www.haygroup.co.uk

Take the tension out of pensions By outsourcing to experts, employers can get a headstart with the new auto-enrolment legislation, and ensure a golden nest egg for employees

Xafinity, the market leading auto-enrolment advisor, warns that autoenrolment is not just a pension issue; it will impact human resource, payroll, reward and finance departments.

Careful planning is required to address all of the risks faced, not just the cost of additional contributions.

From October this year, autoenrolment will impose significant complexity on payroll and human resource functions. Cost, risks and workload will increase. Companies will need to decide whether to recruit and train to address their auto-enrolment requirements. Consideration should also be given to the adequacy of current human resource and payroll systems.

One alternative is to outsource this activity to a specialist auto-enrolment advisor and administrator, such as Xafinity, who can undertake all or part of the auto-enrolment process.

This approach can take the cost, risk and hassle away from the employer without the need for expensive or time-consuming changes to existing processes.

Care will be required in other areas, too, particularly with the adoption of salary exchange and

flexible benefits arrangements to ensure that the employer is not perceived as incentivising employees to opt-out of a pension plan. Xafinity can help you to promote the value and flexibility of the benefits you provide, while ensuring you do not fall foul of legislation.

Understanding the implications of different scheme designs from a cost and risk perspective will be crucial.

Xafinity’s advanced dynamic modelling software can assist your planning process, precisely modelling key factors, exploring alternative strategies and helping key stakeholders to arrive at the combination of measures that most closely suits an organisation’s corporate objectives and timelines.

While many employers recognise the value of well-governed and highly supportive pension arrangements, they often find the cost and management time involved prohibitive. For this reason, we

are seeing a growth in the popularity of master trusts.

Master trusts are multi-employer pension schemes, governed by a central trustee board, which can be used by many employers that are not otherwise related. Economies of scale enable high levels of support to be provided at a much lower cost. Master trusts are able to reduce the governance burden on employers seeking to offer good quality pension provision.

However, not all master trusts are the same. Master trusts offered by insurance companies typically rely upon the employer establishing, maintaining and being responsible for governance committees to address investment, retirement and funding matters and communicate these to members. This creates cost and risk for the employer.

Others, such as the National Pension Trust, are governed by professional

trustees and are independent of all service providers, thus avoiding conflicts of interest and ensuring objective governance to support members to make appropriate investment, contribution and retirement decisions.

The National Pension Trust has been awarded the Pension Quality Mark by the National Association of Pension Funds in recognition of its high levels of governance, communication and member support.

Unlike other pension plans, all employers have to do is contribute to provide their employees with access to pension provision.

The National Pension Trust is a high quality and cost-effective solution for auto-enrolment.

Ken Anderson is head of Xafinity DC Solutions 0118 918 5457 www.nationalpensiontrust.com

Business Reporter · April 2012

an independent report from lyonsdown, distributed with the sunday telegraph

5

Pay and reward

Can employers keep the lid on pay?

We’re light years away from a return to fat pay rises of five to 10 years ago, but after several years of pay freezes and below-inflation deals, employers could struggle to contain the pay bill this year Business performance outlook

6 60

5

51

50

4

47

45

43

40

3 2

32

30

30

23

20

1

12

11

10

0

0.0 Febraury 2012

January 2012

December 2011

November 2011

October 2011

September 2011

VocaLink FTSE 350 Take home pay index

August 2011

July 2011

June 2011

May 2011

April 2011

-1 March 2011

2010

Below target

Consumer price index

2011

On target

10

20

30 40

50 60 55

Organisation’s ability to pay

58

3.0 2.5

41 48

2.0

39 34

Recruitment and retention issues

1.5

27 36

1.0

32

Inflation

38 45

Pay catch-up, following pay freezes or curbs

0.5

24 20

Summer

Public sector

Private sector

Salary forecast by sector Sector

% increase

All orgs Private Public Chemicals Finance FMCG Industrial brands Oil and gas Retail Service Utillities

2.8 3.0 1.5 3.5 2.5 3.0 3.0 5.0 2.0 2.3 3.5

Overall net Source: CIPD

Likelihood to have a pay increase, decrease or pay freeze (%) 0 Spring 2011 Summer 2011 Autumn 2011 Winter 2011 Spring 2011 Summer 2011 Autumn 2011

Source: Hay Group

Winter 2011-12

Autumn 2011

Summer 2011

Spring 2011

Winter 2010-11

Autumn 2010

Summer 2010

Voluntary sector

Source: CIPD

Winter 2011

10

20

30

40

50

60

70

80

90

100 Public sector

Autum

Spring 2010

8

Winter 2009-10

-0.5

8

Autumn 2009

6

Summer 2009

0.0

18

Private sector

Winter

3.5

54

Productivity and performance

National minimum wage

Above target

Pay predictions since 2009

Why increase salaries?

0

2012

Source: Hay Group

Source: Voca Link

Spring 2009

Technically, the UK economy has been out of recession for more than two years. Despite this, pay rates have remained subdued with the vast majority of employers imposing pay freezes or vastly below-inflation increases.

According to the CIPD’s Employee Attitudes to Pay survey, released in January, 53 per cent of workers received either a pay freeze or cut in 2011. However, the research suggests pay might start moving up through the rest of this year: only 9 per cent of private sector employers said they would be imposing a freeze this year, with 35 per cent forecasting a rise and a further 55 per cent holding off making a decision until later in the year.

VocaLink’s Take Home Pay index, which tracks the amount employees receive in their pay packets reflects this upward trend and has been steadily rising since early 2011, albeit well below the rate of inflation. However, the pace of increase has slowed this year, declining from 3.3 per cent in June 2011 to 1.8 per cent in February among the FTSE 350 companies. Even so, manufacturing pay has risen – possibly as a result of increased overtime – as have rates in the public sector, from 2 per cent in November to 2.3 per cent in February.

“This is surprising because we’re told there’s a public sector pay freeze,” says Douglas McWilliams, chief executive of the Centre for Economics and Business Research, which carried out the study. “It may reflect a phasing out of lower-paid workers and the fact that increments to pay don’t seem to have been frozen and people are tending to stay in posts rather than leave.”

Figures from Hay Group suggest 85 per cent of organisations will increase pay during 2012, with the chemicals and utilities sectors forecasting rises of 3.5 per cent. With inflation now falling – the consumer prices index decreased from 3.6 per cent in January to 3.4 per cent in February and is expected to drop further – workers in these sectors at least may start to see a small rise in disposable income. In contrast, the retail sector is expecting rises of just 2 per cent; lower than it predicted at this point last year.

Other sectors are also still feeling the force of the downturn. Office recruiter Office Angels reports a sharp decline in advertised salaries in both customer services roles and administrator positions, while the REC’s Report on Jobs found a small reduction in starting salaries for permanent posts in February. This was the first such drop since October 2009 and perhaps reflects a growing sense of unease about the direction the economy is taking. Temporary rates were up for the second month in a row, however, which the REC suggests could be due to the impact of the Agency Worker Regulations providing temps who stay with one organisation for 12 weeks or more with pay and conditions on a par with permanent staff.

But in a sign that employers are beginning to think about the long-term again, there is good news for graduates on the horizon. According to figures from the Association of Graduate Recruiters, graduate starting salaries will increase by 4 per cent this year to £26,000, after three years of zero growth. Should this happen, it would be the biggest rise since 2005.

Take home pay and consumer prices

Febrary 2011

By Nick Martindale

Business Reporter · April 2012

6

an independent report from lyonsdown, distributed with the sunday telegraph

Industry view

This time it’s personal The introduction of auto-enrolment means that educating people about the value of pensions is increasingly important if they are to make the right savings decisions The shift from defined benefit (DB) to defined contribution (DC) pension schemes appears to be irreversible, but what does it mean for employers and their staff?

Funding a DB pension can cost more than 20 per cent of salary, whereas DC scheme contributions are often less than half this amount, so DC is usually much cheaper for employers. It also allows them to focus on their core business rather than being “a pension company that runs a business on the side”.

But for employees, the boot’s on the other foot. Not only might they receive a much smaller pension, but the onus is on them to ensure that they’re paying sufficient contributions and their fund is invested appropriately for their age and appetite for risk.

Auto-enrolment begins in October. How can the industry make it work?

By 2017 up to 8m new employees will be automatically enrolled into company pension schemes and the challenge will be persuading them to stay.

With tax relief enhancing the amount that employees pay, and employer contributions of at least 3 per cent of band earnings, auto-enrolment is a good deal for most workers. But we also need to educate people about the real value of long-term saving.

Who shares wins Superficial engagement programmes often fail to motivate staff.

So is John Lewis-style shared ownership the real way to secure their commitment?

investment strategies to protect members’ funds from market volatility as they approach retirement.

What’s your view of new providers such as the government’s National Employment Savings Trust (NEST) entering the market?

We’re supportive. We’re working with NEST to create a proposition where some employees will use a Standard Life pension and others, NEST, so there will be co-operation as well as competition.

Savings plan: employers must be ready for pension changes starting in October

How can this be done?

We outline three scenarios in our report, Keep on Nudging. If someone on a salary of, say £25,000, retired today on little more than the state pension their income would drop to around 30 per cent of the income they were used to while working – just enough to live on really.

Over time, however, savings as a result of auto-enrolment could push this up to 45 per cent, enough for a couple of holidays a year and a new car now and then.

Our third scenario assumes some additional provision has been made, either by saving over and above the pension into an ISA or by paying higher pension contributions that automatically

increase over time. Then retirement income could be 60 per cent of final salary: enough to live a much more rounded lifestyle.

How should auto-enrolment funds be invested?

Even today, more than 80 per cent of members use the scheme default funds and make no investment decisions at all.

Auto-enrolment will likely push this even higher, so providers, employers and their advisers will want to ensure the default options are appropriate. Standard Life has launched a new investment proposition designed to cater for different risk appetites. It provides future-proofed Ask any business analyst how to get the best out of your employees and they will likely tell you to foster a sense of shared ownership towards your organisation.

In the hands of HR, shared ownership tends to mean motivating staff by talking about shared goals and outcomes.

In truth, many engagement programmes appear patronising and irrelevant to the needs of employees, which may explain why fewer than one in three of the UK working population is reported by Gallup to be engaged in their professional role.

Recently, the government called for a John Lewis-style UK economy – one in which many more employees have an actual stake in their businesses.

Their argument is that if John Lewis and Waitrose can increase market share, provide superior customer service and beat their competitors during a high street slump, what benefits might be available to other companies prepared to offer employees ownership in the business?

I have worked with many employee-owned businesses and seen f irst-hand t he transformative impact that giving actual ownership can have on the way employees feel about coming to work in the morning.

When staff feel that a small

Pensions minister, Steve Webb, is proposing a number of changes to support auto-enrolment.

What’s your view?

These include consolidating small pensions pots (so someone who changes employer 20 times doesn’t have 20 tiny pension schemes), and abolishing short-service refunds (where workers who don’t stay long in a job can have their contributions refunded when they leave).

They’re well intentioned but they’re not without practical difficulties, and the industry is working hard to resolve these.

Jamie Jenkins is head of workplace strategy at Standard Life Keep on Nudging, Standard Life’s research report on auto-enrolment is available at www.standardlife.com/static/docs/2011/reports/ keep_on_nudging.pdf

part of the business is their own, it unlocks levels of commitment and motivation. Productivity goes up, absenteeism falls; employee innovation rises as do staff retention levels and it becomes easier to recruit top talent.

There are a number of ways to share ownership with employees.

Employee share schemes and employee ownership plans enable employers to offer more generous packages without increasing basic pay. In turn, that allows business owners to compete for the top talent in the market. Both models can deliver significant savings and help companies conserve cash.

HM Revenue & Customsapproved share schemes, which include the Enterprise Management Incentive and Share Incentive Plans, can offer significant tax advantages. It is no surprise that the majority of FTSE 100 and 250 companies use some form of employee share ownership.

Share ownership schemes can always be structured to ensure that owners are not at risk of losing control of their company.

However, if you want your very own version of the John Lewis model, you will need to place a significant amount of business value into an employee benefit trust which holds that value on behalf of all the employees.

This route often ends up being the preferred choice of business owners looking to manage business succession and secure their own exit routes without weakening the business or losing key staff.

The full or majority employee ownership route will not be for everyone, but it is worth noting John Lewis is far from the only success story in this regard. There are examples in almost every industry and this kind of business is worth more than £25bn per annum to the UK economy.

Ownership alone may not deliver the employee and business benefits described above. In fact, experience and evidence shows true employee engagement occurs in the combination of giving employees both a stake and a meaningful say in how the business is run.

However you choose to engage with your employees, with the right professional guidance and with opportunities for employees to contribute to decision-making, this approach can transform business performance and become a USP that helps retain your best people and attract the best talent in the market.

Peter Matthews, director of advisory services at Baxi Partnership 0845 680 6702 www.baxipartnership.co.uk

Business Reporter · April 2012

an independent report from lyonsdown, distributed with the sunday telegraph

Industry view

7

Just what the patient ordered A service that helps staff get the right diagnosis and treatment is a crucial employee benefit and the first step to keeping your workforce in good health It will come as no surprise that the cost of health in the workplace is an ever growing concern for employers.

Britain is plagued by 140m days lost each year from workplace absence.

A report prepared by Dame Carol Black, UK national director for health and work, highlighted the shocking statistic that a quarter of the workforce (7.15 million employees) have health conditions or disabilities impacting their quality of work. Employers are footing the bill for this, paying out a whopping £9 billion annually for sick pay and associated costs.

So what can employers do?

Workplace health benefits are a solution for many employers and one that’s popular with staff – a recent YouGov survey showed most employees said “health and wellbeing benefits are often just as important as financial incentives”.

There is no one-size-fits-all approach to choosing the elements of an employee health programme.

There is, however, one fundamental element that all employers should seek to achieve – help ensure employees’ conditions are correctly diagnosed so they get on the right treatment path

first time. Empowering employees with the tools to ensure they are getting the right diagnosis and treatment can reduce time wasted undergoing unnecessary procedures.

Our thirst for medical information is seemingly unquenchable. In a recent online survey commissioned by Best Doctors, a global health company that provides expert medical advice, 89 per cent of UK adults surveyed said that if they were diagnosed with a medical condition they would seek further information by researching it on the internet. The internet, however, is an abyss of information and when it comes to health matters it is crucial that employees receive information, specific to their condition from a credible medical source.

One solution is Best Doctors, a unique health benefit that is already included in thousands of employers’ benefit packages in the UK. It gives employees the peace of mind that comes with access to the world’s leading doctors – essentially, the “doctor’s doctor”, helping them get the most qualified answers about their condition, diagnosis, and treatment.

Best Doctors’ network of consultants

provides a customised service for each person – from expert medical advice to providing a comprehensive second opinion, all based on a thorough assessment of the patient’s complete medical history, so that employees can make informed medical decisions for themselves and their family.

Leading financial services company BGL Group introduced Best Doctors to its employees in 2009 through its group income protection provider, Canada Life.

Reward and benefits manager Gail Cingolani says: “Best Doctors is a key element in our employee wellbeing programme. The feedback we’ve received from our employees indicates that it gives them reassurance and peace of mind at a terribly worrying time for them.”

Be st Doc tor s U K d i rec tor, Dominic Howard adds: “Our service generates some incredible case studies; anything from individuals getting the reassurance they are on the right treatment path through to life-changing, and in some cases lifesaving information. The employer also benefits from having a member

The key to a successful workplace health programme is to help ensure staff get the right diagnosis and treatment

of staff either getting back to work sooner or being less distracted by the uncertainty of a family illness.

We also ensure that that the treating doctors are always respected – our mission is to support, not replace them.”

There is no one solution to the challenges employers face in

addressing the £9 billion annual cost of employee sickness. There are, however, health benefits that can help staff avoid unnecessary treatments and improve recovery times. Best Doctors is an attractive and innovative example. www.bestdoctors.co.uk

Benefits with bite

By potentially helping to cut absenteeism and increase employee engagement, a company dental plan can make staff smile – and boost your bottom line Looking for more bite to your benefits?

A popular perk topping the employee benefit charts is not only low in cost but can keep your employees smiling, healthy and productive – good news for your bottom line.

Employee benefits are an important part of job-offer negotiations for employers and employees alike. Health insurance products have topped the flexible benefit charts for many years. Why? Most employers recognise that healthy workers are more productive. If employees feel their employer is prepared to take care of their health and wellbeing, this can have a positive effect on staff motivation and engagement – not to mention longer term loyalty.

There is always, however, the question of cost. It’s important that employers look to offer benefits that provide optimum value for money. Some simply cannot afford the cost of a medical plan and seek a lower cost alternative.

Others want to make an extra manageable investment with a complementary benefit that will create a competitive recruitment and retention differential.

For many reasons, organisations have already found the perfect solution in a company dental plan.

Most people have to pay for their treatment and cash-strapped employees know how expensive and confusing dental

treatment costs can be. The issue of whether the market is working well for patients is currently under review by the Office of Fair Trading.

The unfortunate consequence is that sometimes people have to postpone or cancel treatment, despite placing a high priority on their dental health. For an employer, the impact of an employee being at work with mouth pain has wider consequences than a simple decline in their performance.

Left untreated, even the most basic dental ailments can result in more complex dental conditions and ultimately mean time off work. This can become a headache for all concerned. Unplanned absences have a direct effect on your bottom line. One very significant indirect cost is the knock-on effect for other employees. Having to fill in for a colleague – especially if you’re already overstretched – can create a negative working environment and lead to disengagement.

This is where a company dental plan really provides you with a return on investment. With a company plan, as long as the right level of cover is chosen, the majority of private dental treatment charges will be covered. This means employees will face minimal expenses.

Not only does this help manage

unexpected bills but employees can make frequent use of the plan and manage their appointment times. So it’s no surprise to hear that employees place a high value on being a member of a company dental plan.

The key thing for employers is the broad appeal. Regardless of age, gender or status – this comprehensive benefit can be provided cost-effectively to each and every employee.

If you’re trying to achieve employee engagement through managing absence a dental plan is a surprisingly inexpensive and quick way to do this. Many employers are surprised at the ease of installing a dental plan compared to a medical plan. Employees don’t need a pre-joining examination or to be medically underwritten, so don’t need to fill out any paperwork. And they can access covered treatments from day one, regardless of when the condition arose.

And because dental cover can be company-funded, provided as a voluntary benefit or within a flexible benefit package, it has universal appeal for employers.

Why not speak to your intermediary or a provider like Cigna who will be happy to give you a quick and easy quote?

After all, in the current climate we all need something to smile about.

0800 169 5859 www.cigna.co.uk

Business Reporter · April 2012

8

an independent report from lyonsdown, distributed with the sunday telegraph

Pay and reward

Pay isn’t the only way

On your bike: cycle to work schemes are still tax efficient

Big fish in a small pond The market in chief executives is smaller and less global than is sometimes imagined

Employers should think more creatively about how they use their existing pay pot to retain their talent

By Stephen Overell

By Nick Martindale Pressure on the pay bill is challenging employers to use their reward budgets as effectively as possible to ensure staff remain motivated and engaged. A recent survey for Hay Group found two-thirds of organisations intend renewing their reward strategy this year citing reenergising people and cost saving as their main motivations.

“One of our clients spends £20m a day on salaries so they’re really focusing on these budgets says Stephen Welch, a director at Hay Group. “During the recession we certainly noticed a big upturn in enquiries from clients who wanted to understand how competitive their benefits were.”

Employers need to think beyond mere pay if they are to get the most out of the compensation spend. There are many opportunities for engaging people with benefits that are low, or even no, cost to the business.

Salary sacrifice Jeremy Mindell, senior reward and tax manager at Henderson Global Investors suggests offering employees access to company share schemes such as Share Save which allows them to invest a small amount each month. “It’s a good way of aligning employer and employee interests and can deliver substantial rewards for employees, certainly in a recovering economy,” Mindell says.

Such schemes are set up on a salary sacrifice basis, he adds: employees invest some of their existing pay in the share scheme.

Salary sacrifice schemes are an increasingly popular way for employers to beef up their reward packages at little or no extra cost. They are popular with employees and employers because they are exempt from tax and national insurance and they cover a wealth of benefits including company cars, childcare vouchers, extra holiday, bike-to-work schemes and now even smart phones.

Employer-branded discount schemes are another way of helping employees’ salaries go that bit further, and are proving particularly popular at the moment, says James Malia, head of P&MM Employee Benefits. Using them on household

Sky’s the limit: weekend of fun for Sky employees

shopping c a n pro duce savings of £20 a week or £1,000 a year. “ T h e s e small savings can amount to the equivalent of a pay rise,” he says.

Increasingly, companies are also looking at non-financial rewards, tailoring their benefits to the profile of their workforce. Sky, for instance, offers Sky Fest – a weekend of live music and entertainment exclusively for staff and their families. They also allow staff to spend two days volunteering with the local community or working with a charity.

“We know a one-size-fits-all approach to employee benefits isn’t always the answer,” says Deborah Baker, director for people at Sky. “We also provide staff with the opportunity to get involved in our cycling programme; this summer over 400 staff, friends and family will be taking part in events in the UK and abroad.”

London Overground Rail Operations, meanwhile, makes good use of its ability to give staff free travel. By joining forces with sister companies, employees and their families can get free travel across large parts of the UK. “You could feasibly go from London to Birmingham, to Aberdeen so it’s a really good benefit for the whole family,” says HR director Darren Hockaday.

The company has also set up awards ceremonies to recognise people who have long service or have gone the extra mile in the name of work.

However, showing employees just how much they mean to the business doesn’t come naturally to many firms, with line managers often particularly bad at this. “A lot of organisations still aren’t very good at saying ‘well done’ and ’thank you’,” says Duncan Brown, a principal at Aon Hewitt. It sounds simple, but sometimes it really is the little things that have the biggest impact.

Total reward Sometimes staff simply don’t understand what their benefits are worth. This is why retailer John Lewis has introduced the total reward statements – it’s another low-cost way for employers to get more bang for your buck when it comes to pay and benefits.

The organisation issues total reward statements to staff which show information about basic pay, overtime, shift premiums and lunch disturbance allowances, as well as bigger benefits such as pensions and annual bonus. “All these can add

Is there a global market for chief executives?

Of all the justifications for escalating executive pay, this one has perhaps survived the financial crisis and rewards-for-failure furore better than most.

Its logic is simple. There is a global talent pool that irrigates the top levels of corporate life. People with rare abilities will gravitate to wherever they will be best rewarded. Therefore, for owners of businesses to undershoot the market rate for a leader would be non-competitive.

It is time this was thought about more carefully.

The majority of chief executives do not arrive by way of a “market” at all. They emerge from inside their organisations – they are company men (sometimes company women) whose abilities are often context-specific. They are not roving guns for hire.

One could confuse matters by calling this an “internal labour market”, but the favoured phrase is another watery metaphor – a talent pipeline.

Some 59 per cent of FTSE 100 CEOs are internal appointments who have been with their firms for at least five years.

That said, there is a trend towards more external hires: currently 41 per cent. That’s a large minority, especially compared with 35 per cent recruited externally in 2002. Although there are big disparities in the habits of different sectors, hiring externally has been linked to the

up and make quite a difference to the overall package,” says Jon White, manager of leisure benefits at John Lewis.

The retailer is about to release its second paper-based annual statement to staff but it is also making use of new technology by including QR codes. Staff can use them to access more information about the company’s pension scheme through their mobile phones.

“Most of our staff are not desk-based and don’t have day-to-day access to a computer,” says White.

“It is a really good way of engaging with those who are tech-savvy, particularly younger ones.”

This emphasis on non-monetary aspects is a relatively new trend, says Mark Carman, director of communications services at Edenred, which helped John Lewis produce total reward statements. “Organisations are reminding employees about their personal development, health and wellbeing strategies and training, in both online and printed statements,” he says.

The majority of chief executives do not arrive by way of a “market” at all. They emerge from inside their organisations

Your benefits Train operating company Northern Rail, which employs 4,800 staff across 463 stations realised it also needed to make more of its existing benefits programme when an employee survey found most staff looked no further than basic salary.

“We have some really good benefits around free travel and a final salary pension scheme, as well as our employee assistance programme and childcare vouchers,” says Paul Stephen, compensation and benefits manager. Retail vouchers and holiday discounts have also recently been added to the pot.

Stephen spearheaded a communications campaign, promoting the Your Benefits brand and employees received total reward statements showing what they had earned over a 12-month period and what the company had put in on top of that. “For some it was quite an eye-opener, particularly the higher earners,” says Stephen.

The final part of the campaign was a series of roadshows where the benefits team discussed the benefits strategy with staff and answered any queries. A subsequent employee survey showed a strong rise in employee satisfaction, says Stephen, which was instrumental in demonstrating the value of the investment to the board.

phenomenon of the “superstar” CEO – the perceived need for a big name; and, in turn, this swells a rising tide which lifts the boats of insiders and outsiders alike. No firm wants a reputation as a poor payer of its boss class.

Blanket statements about the performance of insiders versus outsiders are difficult to make, and much depends on the health of the company at the time of transition. Headhunting firm Spencer Stuart studied chief executive transitions between 2004 and 2008 in FTSE 150 companies and found internal appointments were the more consistent performers. Picking an outsider was a gamble – it could be a prelude to extremely bad or extremely good results.

Authors Jim Collins and Jerry Porras of Built to Last fame, note that the bosses of “visionary firms” – defined as acknowledged leaders in their sector (think Apple) – are almost without exception internals. Academics also suggest that sectors with a high proportion of external recruits are often “paying for luck”.

It is also less disruptive to bring on someone internally. Knowledge stays within the firm, perhaps trust is higher, too. And there is less risk of an executive exodus as fear of the outsider mounts.

So if the notion of a market in chief executive

Business Reporter · April 2012

an independent report from lyonsdown, distributed with the sunday telegraph

Pay and reward labour needs qualification, what of its putatively global scale?

If the talent pool is global, those fished from it are likely to be diverse. According to a survey compiled for the High Pay Commission, a body set up by the left-leaning pressure group Compass, there were 145 individuals who served as chief executives of FTSE 100 companies between 2005 and 2010. Of these, just over half (85) were UK nationals. The rest were from the US (19), South Africa (eight), the Netherlands and France (five each), Ireland (four) and Australia and Sweden (three each), Canada, Germany and India (two apiece) and one each from Chile, Israel, Italy, Mexico, South Korea, Switzerland and Ukraine.

In the FTSE 250, 77 per cent of chief executives were UK nationals.

Does this reflect a truly global talent pool?

Language, shared business culture and patterns of trade clearly count. But UK chief executives are still an international bunch and many occupations are following the same pattern: 30 per cent of NHS professionals are non-UK nationals, as are 20 per cent of low-skilled workers and 13 per cent of senior academics.

In most occupations, increasing the supply is apt to lower the price. This is part of what makes immigration so politically toxic: internationalising the labour supply is identified with holding back pay, status and conditions for others in the market.

We are asked to believe the exception must be those at the very top where the opposite rules apply. The same goes for one or two other far-out walks of life like sport and entertainment which

occasionally provide a rather strained analogy for business (superstars again). There’s only one Rihanna, only one David Beckham. So there is only one Bob Diamond or Sir Anthony Bamford, too.

In one sense this is quite true: running a large company is not something everyone can do.

However, the claim that there is a relationship between globalisation and top pay runs into some prominent counter-examples.

The US may be a country made by immigrants and the spiritual home of neo-liberalism, but it is also a somewhat less open economy than the UK, not least in its hospitality to foreign-born chief executives. A study in 2008 from rating agency Standard and Poors found that only 14 of the top 100 US companies was led by a non-US citizen. This has not affected world-defying, benchmark-setting rewards for its corporate elite. America enriches its leaders largely without the encouragement of a global market.

We ought to be more suspicious when fingers are waved at global markets as an important factor shaping chief executive pay norms. The market is smaller and less global than is supposed – and it does not operate by orthodox market forces. In fact, the market in top people is unusually susceptible to being manipulated by power, culture and ideology.

The talent pool is shaped by the shoreline.

Are great CEOs hard to find?

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Pensions preparation is key

By Lucie Carrington Estate agency chain Robinson Jackson, which employs around 200 people in the South East is getting ready for major new pension regulations, although they are unlikely to impact on the business before 2017.

“We know the changes are coming so we have started looking at how it will affect our business, when and what it will cost,” says group accounts manager Toby Williams.

Starting with the very biggest organisations in October, all employers must enrol workers aged 22-75 on to a pension scheme. They will also have to contribute a minimum of 3 per cent of salary to the scheme and employees a minimum of 5 per cent.

“Our deadline for compliance is likely to be around 2017 but we want to introduce autoenrolment before then; probably in two to three years’ time,” Williams says. “We’ll start looking at pension providers in the next couple of months.”

Businesses may be able to offset the costs of autoenrolment by reducing the value of other benefits, but they will also incur significant administration costs points out Neilson Watts, associate practice manager with payroll specialists Sage. “It will be a

9

considerable on-going burden on them, especially small and medium-sized employers,” says Watts.

For example, employers will need to ensure their payroll system is set up to deal with changes to employee earnings – which will impact pension contributions – such as promotion or maternity leave. “Preparation is the key and we have already started making employers aware of what’s coming.

The good news is that most organisations still have a breathing space of a couple of years.”

Pension changes in a nutshell Employers will have to: • Enrol workers aged 22-75 into a pension scheme • Make contributions on workers’ behalf • Register with the Pensions Regulator • Provide workers with information about the changes and how they will affect them • Process opt out notices and keep accurate records.

Fishing for a superstar? Look inside your own organisation

What makes top dogs tick?

Cash or caché? When it comes to the sales team, it’s not always money that motivates

By Marc Beishon One thing that preoccupies sales managers and directors is the sales bonus scheme. As former frontline salespeople, they know that the incentive plan drives the sales team’s behaviour.

But there is much to consider: the basic/ commission percentage; the type of sales activity; quota setting; territory planning; the size of bonuses and “accelerators” and when they kick in; the product/service mix; pricing; negotiation leeway, and so on.

Furthermore, today’s salespeople have to get to grips with an online world which is increasingly where their customers are. As a result, incentives are likely to shift away from the number of cold calls to smart work on the computer.

Glassolutions, a £110m building materials firm, is demonstrating the benefit of rethinking sales reward. Sales director Matthew Curtis’s team have to work across the supply chain on often complex projects.

“We offer a good basic salary of 80 per cent that attracts the right calibre of people and 20 per cent for bonuses to encourage the right behaviours,” he says. “They are set an individual territory target, a target to manage the profitability of that target, both with bonuses, and there is a team performance bonus.”

The high basic is unusual – 60/40 is a more common split in business-to-business sales – but it reflects the amount of time Curtis’s sales teams spend with influencers and the complexity of the products they are selling. While Curtis would like to push the bonus more, he’s pretty happy with last year’s results – 20 per cent growth in new accounts.

Meanwhile, energy firm E.ON has introduced a sales academy to enable sales people to gain accreditation for their training. Such academies were popular back in the 1980s and a number of firms have revived them, realising that career development is once again an important part of the sales reward package.

A recent Harvard Business School study suggests peer recognition can be just as important to sales supremos as cash. Researchers found a significant number of sales people at a US software firm were closing deals at the end of the year to make the high achievers award which carried no cash benefit, rather than carrying them over to the next quarter. Some were giving up as much as $30,000 (£19,000) in commission to be top dog.

Business Reporter · March 2012

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an independent report from lyonsdown, distributed with the sunday telegraph

Industry view

Engage and retain No employer wants to lose their best staff, and by following a few simple steps businesses can keep their employees motivated and satisfied

Employee engagement AND retention are key for the successful development of your company – you want to hold on to your best people and make sure they have no reason to look elsewhere.

The role that benefits can play in this is significant. Indeed, in the 2011 Employee Benefits Research survey, sponsored by Alexander Forbes, 71 per cent of employers said that improving employee engagement would be a top priority over the next 12 months.

In addition, 65 per cent of employers said they were looking to increase employee appreciation and perception of their benefits package through better communication and/or the redesign of their benefits to provide the value that employees want.

Achieving increased engagement and appreciation can be quite a challenge. As employers go in pursuit of engaging their employees, the reality of the current economic landscape kicks in.

Employee numbers are down, with many earning less in real terms than a few years ago. At the same time, employers need to achieve increased

productivity and efficiency as well as retain talent and motivate. But how do you go about achieving all this when company budgets remain tight?

The good news is that academics will tell you, quite rightly, that pay in itself cannot motivate. So the stage is set for employee benefits to take on the key role of employee engagement.

First, having the right benefits package is clearly critical. Employers can make sure they achieve this by asking their employees what benefits they would like to see included. It sounds simple, yet many companies fail to do this.

Introducing discounts from local suppliers, for example, can be hugely positive. At a time when employees are looking to get more from their earnings, saving money on regular expenditure in favourite places – from hair salons to restaurants – can be very popular. What is more, these benefits can often cost a company far less than having a national retail discount scheme.

Getting the message across Communication is important, too. Effective communication leads to understanding, understanding leads to engagement, and engagement leads to effective benefits.

Over the past 12 months, Alexander Forbes Consultants & Actuaries has seen clients becoming more interested in creating tailored, fully branded communications.

Employers are increasingly turning

to electronic communications such as an intranet site to promote the value of their benefits, though that is not to say that more traditional forms of communication have fallen out of favour. In fact, to be effective, the communication strategy should include a full mix of activities from face-to-face presentations through to posters, handouts and electronic communications.

It is also important that employers remember to regularly re-communicate the value of the benefits they offer to employees.

Neither having the right benefits package without effective communication nor good communication without relevant benefits will engage your employees.

Looking ahead plays its part too. With hints of a recovery starting to show through, it is critical that companies continue to apply the lessons learned in the tougher economic climate and remember the valuable role that employee benefits can play in engaging their employees.

The result will be better-motivated staff who are more likely to remain with the company, even as job opportunities and job mobility increase. Keeping staff reduces the amount employers have to spend on recruitment as well as ensuring that valuable talent is retained.

Steve Watson is head of defined contribution pensions and benefits at Alexander Forbes Consultants & Actuaries

0800 0718 222 www.alexanderforbes.co.uk

Business Reporter · April 2012

an independent report from lyonsdown, distributed with the sunday telegraph

Pay and reward

11

Find a winning combination Does linking reward to performance pay off? With strong opinions on both sides, the argument looks set to rumble on

By Stephen Overell Anyone who thought the financial crisis might wobble the half-century old corporate love affair with performance-related pay might have to reconsider. In fact, with concerns about performance topping executive worry lists, firms are looking to their pay systems to help improve it.

Two-thirds of employers use performance pay in its assorted manifestations (bonuses, profitrelated pay, individual and collective incentives and so on), according to the Chartered Institute of Personnel and Development (CIPD); the vast majority of respondents to the CIPD’s 2011 Reward Survey were planning to review their pay arrangements with a view to enhancing the performance-pay link.

Stuart Hyland, UK head of reward consulting at the Hay Group, says: “Performance-related pay has grown in its significance. Employers are

At senior levels, it encourages executives to take companykilling risks while neglecting other critical aspects of their job thinking much harder about the behaviour they are trying to encourage and how to target it better.”

Are businesses choosing the right means to the desired end? The research literature is bitterly divided about performance related pay, and critics appear to be in the ascendancy.

In a Harvard Business Review article, two

management professors based at Warwick Business School, Bruno Frey and Margit Osterloh, argue the post-crisis era is the moment to detach pay from performance. It does not motivate and what’s worse, it may hide the intrinsic motivations of work – doing a good job in which one can take pride in the company of people one generally likes. At senior levels, it encourages executives to take company-killing risks while neglecting other critical aspects of their jobs.

Richard Lambert, the former director general of the CBI, also says firms should ditch the fancy performance metrics. Many firms are paying for luck: reward packages seem to follow the performance of markets which employees have little control rather than their firm or business unit.

It is also divisive. In a modern economy that values teamwork and good relationships, isolating

the impact of an individual is extremely difficult. Especially the individuals in the top roles – after all, did the pharaohs build the pyramids?

Yet there are opposing arguments – and not just from consultants and executives whose living is at stake. In their paper CEO Compensation and Firm Performance, Dennis Michaud and Yunwei Gai of Yale School of Management say that of various types of incentive, bonuses do correlate positively with increased returns for investors. (However, they conclude that when performance and pay are decided at the same time, the relationship disappears.)

Basis on which employees would like to be paid (%) 54

Based on how well I perform

41 41

Linked to inflation/cost of living

59 31 32

Based on my experience 27

Linked to the going rate for the job I do Linked to how well my organisation performs

Private sector 2011

34 31 7

Public sector 2011

Source: CIPD

For others, performance pay rests on ethical as much as efficiency grounds.

A vital argument is that fairness is best served by recognising different levels of effort and talent rather than pay ing ever yone the same – and it is an argument that workforces increasingly seem to accept.

Some startling claims have been. The interim report of the Commission on Fair Pay in the Public Sector, a body set up at David Cameron’s behest to examine rising senior public sector salaries stated: “By supporting greater aspiration and work incentives, pay that is proportional to effort may in turn reinforce social cohesion. If the distribution of reward is not perceived as proportionate and/or the product of fair process, this could undermine social trust more generally, encouraging people to become suspicious of one another and to contribute less to public goods.”

And yet successive studies have noted the stark contrast between approval for the principle of performance pay and disenchantment with the practice. Which means firms that have it (the vast majority) tend to fiddle regularly with their pay arrangements to correct unfairness – itself a potentially significant management distraction.

Alastair Hatchett, director of specialist pay research organisation IDS, says: “Schemes are constantly changing because people are uncomfortable with how it gets distributed.”

Going local Business Reporter looks at the data behind the government’s latest wheeze for public sector pay

By Lucie Carrington Extra reporting from Marc Beishon Teacher’s union the NUT announced last week that it would support other public sector unions in opposing Chancellor George Osborne’s push for localised public sector pay. In his budget speech last month, Osborne confirmed that he was investigating localised public sector pay rates and has asked the pay review bodies – which make recommendations on pay rises in the sector – to suggest ways to make public sector pay more “market-facing”. They are due to report back in July.

The government argues that national pay rates for public sector workers is “crowding out” private sector employers in parts of the country – mostly outside London and the South East – where public sector pay rates are higher than private sector rates.

Certainly there is a public sector pay premium.

Figures from the Institute for Fiscal Studies (IFS) show that this premium is at its lowest among

men in London, the North and the North West where it is less than 5 per cent. In Yorkshire and Humberside, meanwhile, it is more than 10 per cent and in Wales it reaches 18 per cent. Among women the premium is even higher – especially in the North where it reaches 18 per cent.

However, this is a long way from proving that the private sector is unable to compete for talent.

For starters, a look at unemployment figures for areas where the public premium is evident suggests increasing competition for jobs rather than for people. In Yorkshire and Humberside unemployment rose by more than 12 per cent in the 12 months to November 2011. In the North East it rose by 28 per cent in the same period.

Furthermore, as the IFS figures show, the public sector premium applies largely to lower-paid workers. Given the continuing squeeze on public sector pay the IFS maintains that by 2014-15 the public sector premium for men will be back to where it was before the economic crisis – zero.

This doesn’t mean the government shouldn’t

Bridge over troubled waters: public sector pay premium is more than 10 per cent in Humberside

attempt to tackle the public sector premium now.

Fairness is the issue when it comes to public sector pay, says Martin Rayson, incoming president of the Public Sector People Managers Association and HR director at Barking and Dagenham Council.

And it’s about more than pay. “Research shows that pay isn’t necessarily the primary motiving factor [among public sector staff],” Rayson says.

“We can do more with reward and benefits to help pay packets stretch further, say by using our buying power in the market.”

However, there is one final point that makes the Chancellor’s trumpeting around localised

pay look like a political standpoint rather than an economic strategy. The pay review bodies that have been asked to consult on localised pay cover just over 2m workers – this includes 1.5m NHS staff but excludes the 1.6m people working for local authorities. We await the pay review bodies’ recommendations.

What’s your view of localised pay?

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Business Reporter · April 2012

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an independent report from lyonsdown, distributed with the sunday telegraph

Industry view

Why cherry-picking is back in favour Process-driven recruitment that relies on technology to sift through masses of applicants can be too blunt a tool to spot the right candidate, as companies are starting to realise

Hand-picking candidates can bear fruit compared with more bureaucratic selection processes

TALENT-ACQUISITION strategies are adapting to the post-credit crunch reality.

Recruitment practices, which have become more process-driven and technology-dependent over the years, are now – counter-intuitively perhaps – becoming more responsive as the supply of candidates has increased.

According to a panel of recruitment experts at the APSCo (Association of Professional Staffing Companies) conference, employers are coming to realise that process-driven recruitment can be too blunt a tool to spot the right candidate – which is increasingly like looking for a needle in a haystack. It’s the difference between ‘mowing’ and ‘cherry picking’. Outside very specialist areas, such as science, skills shortages are often a product of flawed recruitment processes.

Some employers have little choice but to ‘mow’. Employers recruiting a high volume of candidates, such as retailers, often find it

necessary to introduce technology to streamline the recruitment process.

However, in creative industries, such as advertising, bureaucratic recruitment processes can hamper finding the right talent, so there is a continuous battle to simplify procedures despite the greater volume of candidates in the marketplace.

That said, more traditional methods, such as finding candidates through the old boys’ network, can be an equally flawed way to recruit.

A better way to reduce the need for technology to sift through large volumes of candidates is to reduce the number of applicants. The current trend is to make job applications more timeconsuming. By putting more hurdles in the way, the logic goes, only serious applicants will apply.

Candidates may be in abundance but many of these are young graduates looking for their first job. Employers are still adapting to the needs of

Generation Y candidates. Young people work in more collaborative and less hierarchical ways than many senior-level people and organisations are changing working practices accordingly.

Employers will increasingly need to allow Generation Y candidates to engage with the business and even let them participate in defining their own goals, such as creating their own key performance indicators.

Recog nising t hat t hey will want to make use of technology, such as social media, through their work is also critical to recruiting and retaining them.

Ann Swain is chief executive of APSCo 08458 997 388 www.apsco.org

A vehicle for worker benefits Salary sacrifice for cars benefits employer and employees; it’s an attractive perk to entice and retain staff and is more cost-effective for workers than using personal income Businesses have been relying on cars to attract, motivate and retain key talent since the days of the Model T Ford.

And now, thanks to the inherent tax efficiency of ‘green’ cars, employers are leveraging their appeal right across the workforce through the medium of salary sacrifice for cars.

“Last year, one of the UK’s largest employers rolled out car salary sacrifice as a benefit option for all its 17,000 employees. And since then, wordof-mouth recommendation has strongly driven uptake of the benefit in the company – which is always a clear sign that a benefit is demonstrating its worth,” says Paul Hollick of fleet management company, Alphabet.

Salary sacrifice for cars hinges on the substantial financial advantages of low-CO2 cars, which benefits both companies and their employees.

It is cheaper for staff to sacrifice cash salary

in return for a company-provided car than it is for them to buy a new vehicle privately using income that has been taxed at 20 or 40 per cent.

Benefit-in-kind (BIK) tax rates on salary sacrifice cars can be as low as 10 per cent of the car’s P11D value (used to calculate the amount of company car tax you pay).

“The company also wins. It pays lower employers national insurance and depending on the car, employees could pay as little as 10 per cent BIK versus the 20-40 per cent paid through PAYE. It also cuts the company’s carbon footprint with every environmentally friendly car deployed on the scheme,” says Hollick.

Drivers who opt for salary sacrifice can make a four-figure cash saving over a three-year car contract. Changes such as maternity leave are not a problem, as they can be insured against and employees may convert the benefit into a personal

finance arrangement if needed.

Many firms channel savings from their scheme into a cash pool that they can draw on if necessary.

Businesses are finding that incorporating this highly attractive and largely self-financing benefit into their reward strategy is usually very straightforward.

A reputable and experienced scheme provider, such as Alphabet, will ensure that all the essential aspects are taken care of, although companies should always get additional input from

their own legal, tax and pensions advisors.

For many employees a car is the second biggest household expense after accommodation. As family budgets strain under the pressure of austerity, salary sacrifice for cars is a benefit that looks set to prove its worth time and again.

In summary, a salary sacrifice for cars scheme is almost too good to be true.

Call Alphabet 0870 50 50 100 www.alphabet.co.uk

Business Reporter · April 2012

an independent report from lyonsdown, distributed with the sunday telegraph

Pay and reward

13

Giving power to the people The government wants more firms to consider employee ownership – or at least to issue shares to staff. We really all could be in it together

By Stephen Overell Seldom has employee ownership been so politically fashionable. The Tories want employeeled mutuals and co-ops to run public services; the Lib Dems have turned to the model in their anger at what they see as irresponsible corporate behaviour with calls for a “John Lewis economy”.

Clearly, there are high hopes of a sector worth about 2 per cent of the value of the UK economy (£25 billion by turnover). But someone has to turn vaulting rhetoric into practical policy.

Step forward Norman Lamb, the employment relations minister, a Liberal Democrat, and Graeme Nuttall, a City lawyer who is leading a government review of employee ownership which is due to report in July.

Employee ownership is a liberal tradition, notes Lamb. He invokes John Stuart Mill and Jo Grimond – but is quick to stress coalition unity on the issue.

“It’s not going to transform capitalism, but then there is no reason it should be stuck at 2 per cent.

The plc will continue to dominate, but there is room for greater diversity. The government setting out to look at the obstacles faced by the sector and publicise the possibilities is unprecedented.”

Employee ownership is often held up as an alternative to the slavish pursuit of shareholder value – the central motivation of Anglo-American capitalism and, according to many, one of the principal causes of the financial crisis. Maximising value so shareholders can exit a company is contrasted with the patient, committed capitalism of generating better results through better motivational methods and dispersing rewards more fairly, thus addressing economic and social problems simultaneously.

But ownership comes in many colours. There are firms wholly owned by their employees, often via a trust; John Lewis has become synonymous with this form, but there are other successful examples, such as Arup, Circle Healthcare, Scott Bader and Tullis Russell.

Then there are firms with “significant” employee shareholdings, variously defined as 5, 10, 25 or 50 per cent of stock. And there are firms which issue shares to their employees, as 80 per cent of large firms do already, although fewer than half have all-employee schemes. Only about a third of firms outside the FTSE 250 have shares owned by workers while knowledge is limited about employee share ownership in the

unlisted private sector where 12 million people work. “There is value in them all,” says Lamb.

So what is the government planning? There are few details. But it is concentrating on three areas: low awareness of employee ownership; lack of resources to make it happen; and the legal and financial complexity of doing so.

Changing ways: review leader Graeme Nuttall, left, and employment relations minister Norman Lamb

Lamb says a common problem experienced by businesspeople contemplating employee ownership is that they turn to their accountants and lawyers for advice only to be steered away swiftly. “They had to be zealots to make it happen.

We want to make it mainstream.”

A right to request shares in a firm at a “moment of succession” – when a founder steps down or thinks of selling, for example – is also on the agenda. The question, here, concerns an owner’s corresponding right to say no. Without a means of enforcement a request could be ignored. This is difficult for the coalition. “We are part of a government that does not believe in creating burdens for business. If we go down that route, it will just create resistance,” says Lamb.

In tough economic times, much of the popularity of ideas around employee ownership rests on claims about superior performance among employeeowned firms. There is certainly evidence of this, but it is sometimes subtle. Research has also found that outright ownership and share participation both bring benefits. The biggest study, from Rutgers University in the US in 2000, compared the performance of firms after employee share ownership plans (ESOP) were issued with similarly sized firms which did not issue them. The ESOP firms had 2.4 per cent higher sales growth and 2.3 per cent higher employment growth.

In the UK, a study by Cass Business School concluded that employee-owned firms were more resilient to recession, outpacing the growth of conventionally owned peers by 11.8 per cent during 2008-09. They also created 7.5 per cent more jobs. In booms they appear to grow less fast.

However, one of the consistent themes of studies going back 30 years is that ownership alone may not yield significant gains. When financial stakes are reinforced by participative management practices, such as granting individuals and teams autonomy in their work, then ownership delivers the promised motivational benefits.

This is an important caveat. If ownership is a

kind of “commitment device” it needs switching on in day-to-day workplace interactions for it to be meaningful. By extension, firms that crave “engagement” from their employees might do well to issue shares to make their intentions more credible.

Is life so different in employee-owned firms?

At Arup, a construction design engineering firm

owned by an employee trust, the structure is viewed as part of a wider ethos. Founder Sir Ove Arup died in 1988, but his spirit lingers in a kind of sacred text called the “key speech” that is required reading for new recruits and talks of “humane organisation”, “quality of work” and “social usefulness”. The firm does not aim explicitly at being profitable – but it is: margins stayed above 10 per cent even in the depths of 2010-11. Group chairman Philip Dilley plays down how different working for Arup may be but believes the absence of shareholders has advantages. “Not having investors creates a genuine independence and without the annual pressure of results, the firm can invest for the long term [Arup does not borrow money and makes acquisitions from cash reserves].”

He says the emphasis on “giving people space” by encouraging them to get involved in work beyond their speciality, is harder in a financially driven firm. “No-one is going to get rich working at Arup, but there is a pride that comes from working for us.”

United responsibility The owner’s retirement was the catalyst that led one Scottish factory to become employee owned It wasn’t always the case, but Stewart Buchanan Gauges, which manufactures pressure gauges and valves in a factory in Kilsyth outside Glasgow, is owned by its employees.

The firm has been on the site since 1870, but was bought by entrepreneur Frank Phair in 1970 and became owned by an employee trust on 21 December 2011, when he retired.

Managing director Stephen Nicol says: “Frank wanted to plan an exit strategy and looked into various options. He wanted to protect the employment in the local area and didn’t want to sell to a competitor or someone who only wanted the customer base and would strip down the assets.”

Inevitably, it’s been a major step for the 151 workers. At the time of writing, elections of two employees to a management board and a board or trustees were due to take place, while a series of workshops were being run by the Baxi Partnership, which advises and funds employee owned and cooperative businesses. The mechanics of holding 50.1 per cent of shares in an employee benefit trust and 49.9 per cent in an internal share incentive plan in which no individual can hold more than a five per cent stake needs explanation.

“I’d say they [the employees] have been mostly supportive,” says Nicol.

Responsibility comes with ownership. Stewart Buchanan is a stable, cash-rich company, but it operates on a relatively short forward-order book of six weeks. But then it always has. Nicol says the firm is busier than ever with turnover and profits rising. It also has a long-serving management team: the finance director has been there for 20 years, the sales director for more than 30.

“I am committed to creating the enthusiasm within the employee base for employee ownership and in breaking the old them-and-us mentality,” he says. “Employees can influence things when big decisions need to be made.”

Business Reporter · April 2012

14

an independent report from lyonsdown, distributed with the sunday telegraph

Industry view

It pays to be educated While pay rises may not be an option again this year for many companies, employers can give employees the tools to help them save money and plan for a brighter future It is a given that you diligently study during your school years to get your head around some complicated mathematical concepts – algebra being most notable – only to find they hold little practical application in your everyday life.

W hile the problem of low financial understanding in the UK is nothing new, ongoing tough economic conditions are ensuring that it is now highlighted as a significant contributor to the problem of employee stress and associated absence. In fact, concerns about money represents one of the top five employee concerns, according to health insurance provider Aviva’s fifth annual health of the workplace report, with 32 per cent of all respondents citing this response.

The Chartered Institute of Personnel and Development (CIPD) recently highlighted this problem stating that employees are experiencing pay freezes and higher inflation with one in 10 workers falling behind with bills. The CIPD warns that employees experiencing financial difficulties are more likely to be under stress and be less satisfied at work. This can lead to higher absence from work, more accidents and more problems with mental health.

In fact, research by the CIPD reveals that about 1.4m days are lost each year through sickness linked to anxiety and coping with financial worries.

In line with this, a CIPD spokesperson

commented that it was in employers’ interests to support employees in tough times by “providing advice and support on debt management and financial planning”.

Many employers provide a comprehensive benefits package to their employees but very few workers understand the value of these packages.

Even fewer are aware of the built-in financial education aspects included in some benefit arrangements. These financial planning tools may be utilised at any time to help with planning for everything from day-to-day budgeting to retirement and salary protection provision should the unexpected happen, for example, income protection to help during times of longterm absence due to illness or injury.

Employee benefits consultancy Enrich is working closely with a number of clients to address this, by helping them audit existing benef it ar rangements and associated communications.

The results of these comprehensive audits are analysed and used to help organisations design bespoke financial education programmes to suit individual business and employee needs.

This exercise will not only help address the problem of low financial literacy, but will also remove some of the worries currently faced by

employees and, consequently, help reduce stress-related absence.

When the problem of financial literacy was first highlighted in 2006 by a Financial Services Authority (FSA) survey, the industry regulator concluded that the problems of debt were severe for a small proportion of the population, and many more people may be affected in an economic downturn.

That situation is now well and truly upon us and the FSA’s predictions are certainly ringing true. The threat of a second recession and ongoing difficulties in the eurozone continue to heighten the overall uncertainty surrounding the economic climate.Employers are well placed to help their employees through these tough times.

Improved f i na nc ia l u ndersta ndi ng ca n help to empower employees. I n

turn, empowerment leads to improved staff motivation and morale, which leads to improved productivity for the organisation. A better result all round.

020 7997 5800 www.enrichbenefits.com

Britain’s got talent; but does your business?

There are plenty of talented people out there, but how can you get them to work for you? Setting development plans, seeing potential and offering job variety are just a few tips for the top W i t hout e m pl oy e e s, a n organisation simply wouldn’t exist.

And without talented and motivated employees, an organisation has no hope of flourishing and staying comp et it ive . I nte r n a l t a le nt management is vital to the success of any organisation, and helps ensure that staff and future leaders are engaged, productive and working to their full potential.

There are a few considerations for companies wanting to make the most of their internal talent, all of which are invaluable if a company is to use its existing employees to grow and

flourish. First of all, you must work to entice your market’s top talent. It pays to create an attractive induction programme that turns interest in the organisation into deep respect and profound admiration. The aim is to develop a constantly reinforced belief in the new recruit that they have made the right choice in coming on board and that all the talk and promises made at interviews are followed through and delivered.

It’s also worth remembering that everyone has potential, so you should work to create an ethos where every employee is acknowledged as having

potential. An in-house learning and development programme can encourage a broad talent philosophy that makes sure everyone is challenged and given the chance of job progression.

Once you’ve captured these fantastic employees, remember to look after their interests. A significant percentage of staff only discover that they were valued and appreciated on the day they leave or when they decide to hand in their notice. This mindset of focusing on flaws and weaknesses, rather than successes and strengths, needs to stop.

Everyone should feel valued and there has to be a company-wide culture of sharing talent and not holding on to it, otherwise successful teams become too competitive and problems begin.

There are plenty of other things you should do in order to spread an

unmistakable message that staff are valued, respected and have a future in your organisation. For example, create personal development plans and build them in to appraisal systems; seek regular performance feedback and offer staff secondments to other areas of the business. Also provide employees with opportunities to take time out of their regular day-to-day tasks to work on more strategic projects.

The final piece of the puzzle is a fantastic talent manager. The majority of the tips mentioned above are entirely dependent on strong managers who understand that people play a big part in their own success. It takes an intuitive manager to value the talent; talk with other managers to know where opportunities lie and share those skills around the organisation. Without them,

employees are faced with little direction and a lack of inspiration, so having the right manager in place will go a long way in helping to support business prosperity.

Never before have businesses faced so many challenges. However, by introducing these simple tips, organisations of all sectors can realise the benefits of having a highly talented, loyal and productive workforce. This, no doubt, will go a long way in helping your business to stay on top, overtake the competition and overcome the daily hurdles presented by today’s ever-changing world.

Kevin Young is managing director of SkillSoft EMEA 01276 401 994 www.skillsoft.com

Business Reporter · April 2012

an independent report from lyonsdown, distributed with the sunday telegraph

Industry view

15

Automatic for the people If you plan well and engage your employees, automatic enrolment can help you breathe new life into your company pension scheme Between October 2012 and 2017, depending on the size of your payroll, your business must begin to automatically enrol particular employees into a pension scheme that meets certain standards, and make contributions on their behalf.

This legislation marks the greatest change to social security policy in decades, forcing those who are able to save into taking greater financial responsibility for their own retirement. At the same time, it is perhaps the biggest ever social experiment, relying on inertia (perhaps too optimistically) to stop those not currently saving from opting out.

While many businesses are focusing solely on the challenges of complying with the new rules and managing the administration burden they will bring, the increased awareness of retirement saving among the workforce presents employers with an invaluable opportunity you shouldn’t miss.

By ensuring your pension scheme is aligned with your reward strategy, you can demonstrate the value of your employer contribution and increase employee engagement with your business.

These regulations are highly complex, however, and represent a significant business risk in terms of the challenges of administering and managing the changes, so you must carefully plan to ensure your business is prepared. For that, we suggest a five-point action plan.

First, work with a benefits consultant to assess which employees are eligible for enrolment to ensure an accurate data set from the start.

Next, establish your staging date which, depending on your company size, could be between October 2012 and 2017.

Third, establish exactly what you are going to pay into the pension scheme, so that you can project your financial liability and budget accordingly.

The fourth step is to decide how you will administer this. The obvious place for autoenrolment to sit is within a benefits solution which allows employee preferences to be accessed and controlled via an online portal. A company pension is a valuable benefit that forms part of an employee’s reward package and for this value to be understood, employees must see it in context.

Factors in effectively managing auto-enrolment include integration with payroll, HR systems and dovetailing with everyday HR processes, and those employers who think they can administer and manage auto-enrolment via a bolt-on payroll or pensions-only product are likely to become unstuck.

Last, agree your engagement strategy. You need to ensure that employees fully understand both the concept of auto-enrolment and what it means for them. You must ensure your employees are able to access information that helps spell out the financial liability of staying in the scheme, and indeed the implications of opting out. A benefits portal can be used to disseminate information, as well as to help engage employees in the scheme.

The guiding principle for communication is little and often, ensuring that employee understanding is regularly refreshed so they know how to access information relating to their package. The ultimate aim is to develop ownership of the scheme from the company to the employee through an ongoing education and communication strategy.

Much has been written about the administrative and financial burden that auto-enrolment will bring. There’s no denying its potential to create issues in both camps, but if implemented correctly, and with a robust engine in place to deliver it, this reform can create positive change in your reward strategy, and increase employee engagement.

By increasing your work force’s appreciation of their pension as a fundamental benefit, auto-enrolment provides you with perhaps the best opportunity in years to breathe new life into your company pension scheme.

Michael Whitfield (left) is CEO of Thomsons online benefits 0203 328 4020 www.thomsons.com/ auto-enrolment

When employee benefits need a boost Health cash plans can be a creative way to compensate staff and even raise company productivity when a pay rise is not guaranteed While testing economic conditions persist in the UK and worldwide, there is good news from at least one sector: new research shows that the health cash plan industry is prospering as more and more businesses seek ways to enhance staff benefits in the downturn.

With more than one in 10 employers saying they do not expect to increase staff wages in 2012, bosses are having to be creative where employee benefits are concerned.

A survey of 230 UK employers by Aon Hewitt, the employee benefits consultancy, suggests that the average pay increase in 2011 was 3.1 per cent, well below the rate of inflation. Aon Hewitt predicts that pay rises for 2012 will be just 3.2 per cent on average.

For thousands of UK employees, a pay freeze will effectively mean a pay cut when the rising cost of living is taken into account.

Leading health cash plan provider Medicash says that more employers are exploring low-cost ways of expanding staff benefits and providing tangible alternatives to pay rises.

“We are seeing a steady year-on-year rise in the number of corporate paid cash plans as more employers understand how such plans can be used to positively enhance employee benefits packages,” says Medicash chief executive Sue Weir.

According to Laing and Buisson’s health cover UK market report 2011, the value of the UK cash

plan market grew by 11 per cent between 2009 and 2010 from £602m to £670m, thanks to increasing investment in employer-funded plans.

Medicash predicts further growth for corporate paid plans in 2012 as the plans become a more regular feature in salary reviews.

A health cash plan provides employers or individuals with a range of health cover, including dental, optical, physiotherapy and employee assistance programmes.

Plans can be used on their own or to enhance private medical insurance packages.

They can start from just £1 per week and offer a host of benefits not usually covered by traditional private medical insurance.

Sue Weir says: “If used correctly, a good plan can provide hundreds or even thousands of pounds worth of benefits for employees each year, which can feasibly be used by employers to ‘top-up’ salaries – allowing employees to see an immediate impact on their finances.”

Chester & District Housing Trust introduced a Medicash health plan for their employees in 2009 as part of a wider staff benefit and wellbeing strategy.

The trust, which is part of the Cosmopolitan Housing Group following a £1.3 billion merger in December 2011, employs almost 500 people largely across the North-West of England.

Su Bramley, Cosmopolitan Housing Group director of corporate services and governance,

says: “We initially introduced a cash plan as a way to strengthen our benefits package for colleagues while also helping us to address sickness absence, stress management and the general wellbeing of our employees.

“So far it’s been very useful, allowing us to offer valuable healthcare benefits which are more focused on catching and treating a problem before it escalates into a more serious private medical insurance claim.

“We have seen dramatic results in both staff

productivity and morale since the introduction of our strategy and the health cash plan has played a significant part.”

The trust was ranked 27th out of 100 in The Sunday Times list of the top 100 companies to work for in 2011, which they attribute in part to their emphasis on employee health and wellbeing.

Su Bramley adds: “We have had a great response from colleagues since the implementation of the plan, which has helped to boost our status as a quality employer. For us, a health cash plan has made real business sense.”

0800 011 2222 www.medicash.org