flexible benefits

Show Summary Details

Quick Reference

Systems allow for a degree of employee choice over the form of remuneration. There are two main forms. Within-benefit flexibility allows the employee to take more of a particular benefit by surrendering cash rewards and vice versa. For example, an employee may opt to take more paid holiday, or a better company car, or a higher level of health insurance, though at the cost of reduced salary. Alternatively, benefits may be given up or taken in reduced form in order to receive more salary. The second form is across-benefit flexibility, which is also known as cafeteria benefits. Under schemes of this kind, employees are awarded either a sum of money or a number of points and can ‘buy’ benefits which suit their particular needs. An employee, therefore, could accept a lower-value company car and use the amount saved to buy additional pension or health cover. The use of flexible benefits has increased in recent years in both the UK and the United States for a number of reasons. Advocates emphasize the element of choice in these schemes and the fact that they can accommodate the needs of a more diverse and individualistic workforce. In addition, however, their use reflects the reduced tax efficiency of benefits, and particularly of company cars, which has led to the spread of cash-or-car options within company car schemes. Flexible benefits can also be used to enforce tighter control over benefit costs and this has been a major reason for their spread in the USA. A key feature in this regard is that schemes allow a proportion of the cost of expensive health care to be transferred to the employee. If total remuneration increases in line with inflation but health costs rise at a higher rate, then a higher percentage of the employee's total reward has to be allocated to maintain the value of the benefit. Despite the advantages to employers, there are a number of constraints on the use of flexible systems and, in the UK, full-scale cafeteria plans remain rare. The latter can be complex and costly to administer and require a relatively sophisticated reward management function. They can also raise costs as the advantages of bulk purchase of benefits are diminished and as employees make maximum use of the suite of benefits on offer. [See benefits.]

Subjects: Human Resource Management.

Reference entries

Users without a subscription are not able to see the full content. Please, subscribe or login to access all content.