19 Apr 2021
Employee benefits: an
introduction
Learn how to implement various employee benefits as part of a wider reward strategy
Introduction
Employee benefits offer a way to attract and keep people, contribute towards improving
wellbeing and encourage required behaviours, achievements, values and skills. However,
there are several factors to consider when introducing a benefit to make sure it’s valued
by workers while also supporting people management practices and aligning it with wider
business goals.
This factsheet explores the past and present of employee ‘perks’ from the days of
paternalism to the start of the welfare state and through to today’s more individualised
approach. It looks at the variety of benefits employers can offer, and what to consider
when implementing employee benefits as part of a reward strategy.
What are employee benefits?
Employee benefits are non-cash provisions within the reward package, although they can
have a financial cost for employers, for example paid holidays, pensions or company cars.
They may be offered for business reasons, for example motivating employees to achieve
organisational objectives, and/or ‘moral’ reasons based on a desire to care for employees’
wellbeing (and, in so doing, potentially enhance employee engagement). The prevailing
financial, legal and social background also plays a role in the development and shaping of
benefit policies and practices.
Our Reward management surveys indicate that the most common business reason for
providing employee benefits are to attract, recruit and retain the employees to support
current business needs, while the most common external drivers influencing benefit
provision are legal and employment obligations.
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A brief history of employee benefits in the UK
In the earliest days of UK benefit provision, some companies offered benefits because
they believed they had a duty of care to their employees, a policy commonly referred to as
‘paternalism’.
At the turn of the 20th century, the state introduced benefits for the general population
and, after the Second World War, the welfare state was established to provide such
benefits as unemployment insurance, sick pay and state pensions, as well as the National
Health Service. While many state benefits continue to be provided universally as a safety
net, some organisations have built on this by offering their own more generous or
complementary arrangements.
During the 1970s, attempts to control the growth of pay, combined with high marginal tax
rates, drove many employers to develop generous benefits provisions, especially for
senior staff, to circumvent the difficulties in using fixed pay.
Since the 1980s, the tax regime for employee benefits has tightened, limiting the
attractions of certain benefits over cash. However, it can prove hard to remove or
downgrade them once they have become an established part of the package.
Recent developments
More recently, some employers have adopted a more individualistic approach to
employee reward, transferring more of the risk (and, potentially, reward) and cost of the
provision to their workers. Benefit provision has seen a widespread shift from defined
benefit pension schemes to defined contribution plans (particularly in the private sector)
and some movement from fixed to flexible and voluntary benefits.
However, employee benefits are no longer seen just as a retention tool. Research has
found that what makes an organisation’s employment proposition attractive depends on
an employee’s individual circumstances (such as being a carer). This has created the
concept of ‘total reward’, where employers adopt a bundle of mutually supporting
financial and non-financial rewards (such as flexible working) that align to the needs of the
business and its employees. Such an approach has led many to regard employee benefits
as a strategic tool to help attract, retain and motivate the talent needed to support the
organisation’s purpose and performance. See our factsheet on strategic and total reward.
One concern of employers is whether their people can adjust to a situation where they
shoulder more of the risk (and reward). As well as the moral duty some employers feel
towards helping to educate staff about the possible consequences of their benefit
choices, there is the business case that a financially secure workforce can bring. For more,
see our Employee financial wellbeing report.
© Copyright Chartered Institute of Personnel and Development 2021, 151 The Broadway, London SW19 1JQ, UK
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The COVID-19 pandemic has increased internal and external pressure on employers to
review the adequacy of their healthcare and risk benefits, such as occupational sick pay,
as well as their overall financial and mental support for their staff, such as for those who
have had to shield at home. Our 2020 Reward management survey found that while many
employers have responded to these pressures, the changes are likely to be temporary.
Types of benefits
Our Reward management surveys find that main benefits UK employers offered to either
all employees or dependent on their grade, location or occupation include those covered
below.
Pensions
These are widespread due to legal requirements. One of the more costly parts of the
benefits package, workplace pensions are often at the centre of major internal or external
change.
Holidays and time off
Employers are required by law to offer certain levels of paid annual holiday, although our
Reward management surveys find that many offer more than the minimum.
There are also statutory entitlements to other types of time off work including maternity,
paternity, adoption, parental and bereavement leave. As with holidays, many employers
often provide more generous time off arrangements than required by law. There’s more
in our Working hours and time off work factsheet.
Healthcare and risk benefits
These benefits may be provided to ensure both the welfare and productivity of
employees. Our Reward management surveys find that the common types of benefits
include:
Occupational sick pay.
Employee assistance plans.
Death in service/life assurance.
Eye care vouchers.
Gym (on-site, subsidised or discounted membership).
Some benefits are given to all (such as occupational sick pay), while others (private
medical insurance for instance) are dependent on factors such as grade, occupation or
© Copyright Chartered Institute of Personnel and Development 2021, 151 The Broadway, London SW19 1JQ, UK
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location.
Group risk insurance policies, including group life assurance, group income protection
and group critical illness, transfer some of the risk to a third party.
Company cars and car allowances
Many organisations provide a company car, either because the employee’s job needs it
(for example, a sales rep) or to recognise the job’s status (for example, director). Such
vehicles are taxed according to their CO2 emissions. Some employers prefer to pay a cash
allowance to help employees with the purchase of cars or compensate them via mileage
allowances for using their own vehicles, rather than supply a company car.
Other benefits
Employers may offer a diverse range of other employee benefits including: unlimited
holiday, concierge services, free or subsidised staff canteens, and a nap room. See more
on the variety of staff benefits on offer in our Reward management surveys.
Taxation and salary sacrifice provisions in the
UK
Certain employee benefits attract preferential tax treatment, often in line with
government policy to encourage or support certain choices (as, for example, with
pensions, or cycle-to-work schemes whose attractiveness has been boosted by the
COVID-19 pandemic).
Under salary sacrifice arrangements, an employee gives up part of their pre-tax salary
and in return the employer agrees to provide a benefit. For instance, under a pension
salary sacrifice scheme the employee gives up part of their gross pay while, in return, the
employer makes an equivalent contribution to the pension. This means that the employee
saves on income tax and both the employer and employee save on national insurance
contributions. The employer might use the NICs savings to help run the scheme or to top
up the employee’s pension.
However, organisations should consider the implications of salary sacrifice arrangements
for employees in respect of provisions such as working tax credits/universal credit or the
national minimum wage.
The tax position on employee benefits and salary sacrifice may change. For up-to-date
information, see the HMRC website.
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Choices in benefit provision
Cash or benefits?
Some employers prefer to provide cash to enable employees to purchase those benefits
that best meet their needs. This approach, often called ‘clean pay’ is easily communicated,
understood and administered.
However, on the downside, staff could:
Spend more money buying their own benefits than it would have cost the
organisation to do on their behalf.
Spend work time searching for the best deals.
Make poor choices.
Flexible and voluntary benefits
Flexible and voluntary benefits schemes both aim to offer employee choice by providing
flexibility over individual benefits packages, but it’s important to distinguish between
them.
Flexible benefits arrangements (known also as ‘cafeteria benefits’ or ‘flex plans’) allow staff
to vary their package to meet their own needs. The dividing line between pay and benefits
is less fixed than in standard reward packages. In most schemes, employees are able
either to retain their existing salary while changing the mix of various benefits they receive
or move their salary up or down by taking fewer or more benefits.
Voluntary benefits (also known as affinity benefits) allow employees to buy products and
services, at a discount, through their employer out of their own taxable income or
through a salary sacrifice arrangement. These schemes differ from flexible benefits as the
employee pays for the cost of the benefits. Under voluntary benefits schemes, although
the employer does not pay for the benefits provided, it may incur research,
administration, communication and launch costs.
Such initiatives can align with the increased focus on reward individualisation, help
address inclusion and diversity, be cost-effective and assist in the harmonisation of
reward practices, especially during a merger or acquisition. In practice, both flexible and
voluntary benefits schemes may be used by the same organisation.
When planning to introduce ‘flex’, it can be useful to start by offering benefits on a
voluntary basis – though sometimes the planned move to flex never happens. The idea is
that this allows organisations to test the popularity of various benefits, design and finetune their subsequent scheme.
© Copyright Chartered Institute of Personnel and Development 2021, 151 The Broadway, London SW19 1JQ, UK
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When offering these schemes, it’s important that the choices, and their consequences,
are made clear to employees. If the options are seen as complicated, or the method of
making choices as difficult, then individuals may just keep their existing benefits package
and much of the resource spent introducing the scheme will have been wasted. In some
instances, it may be more appropriate to offer a limited but meaningful choice of options.
Our report Show me the money! The behavioural science of reward has more on how
employees may respond to choice.
Strategy and implementation
Before introducing, revising or removing a benefit, it’s important for people professionals
to ask:
Why is the organisation introducing/offering the benefit? How does it support the
organisation’s business goals? How does it reward the values and behaviours
needed?
How does the benefit fit into the HR and reward strategies? Does it support the
people management and development practices the organisation requires?
Will the change be valued by current and future employees? Have their views been
researched?
How will the benefit will be launched? Who are the key stakeholders and how will
they be involved? Does the launch team have the required skills, knowledge and
support?
How will the organisation explain what’s being introduced, and why, to line
managers? How will the benefit be explained to staff, including what they must do?
How will the benefit be communicated on an ongoing basis?
How will the change be explained to external stakeholders, such as investors or
customers? Do their views need to be considered and, if so, how?
How flexibile are the implementation and communication plans to changes in the
business context?
Do employees have the knowledge, skill and attitudes needed to make informed
decisions? Is there a need to invest in financial awareness?
What factors will be used to assess whether the benefit successfully supports the
organisation’s goals?
© Copyright Chartered Institute of Personnel and Development 2021, 151 The Broadway, London SW19 1JQ, UK
Incorporated by Royal Charter, Registered Charity no. 1079797 123 Page 6 of 8
For more on benefits communication, and evaluation, see our Reward management
surveys and our employee communication factsheet.
Useful contacts and further reading
Contacts
GOV.UK – Expenses and benefits for employers
HM Revenue and Customs
The International Employee Benefits Association – IBEA
Books and reports
PERKINS, S.J. and WHITE, G. (2020) Reward management: alternatives, consequences and
contexts. 4th ed. London: Chartered Institute of Personnel and Development.
ROSE, M. (2018) Reward management: a practical introduction. 2nd ed. HR Fundamentals.
London: CIPD and Kogan Page.
Visit the CIPD and Kogan Page Bookshop to see all our priced publications currently in
print.
Journal articles
BARTON, T. (2016) How to determine which group risk benefits best suit an organisation.
Employee Benefits. 27 July.
BASKA, M. (2018) Businesses ‘throwing money down the drain’ by not communicating
employee benefits. People Management (online). 27 July.
HOWLETT, E. (2019) Why the most effective employee benefits don’t have to cost you
anything. People Management (online) 22 August.
HOWLETT, E. (2020) What benefits should you be providing to home workers? People
Management (online). 26 October.
CIPD members can use our online journals to find articles from over 300 journal titles
relevant to HR.
Members and People Management subscribers can see articles on the People
Management website.
© Copyright Chartered Institute of Personnel and Development 2021, 151 The Broadway, London SW19 1JQ, UK
Incorporated by Royal Charter, Registered Charity no. 1079797 123 Page 7 of 8
This factsheet was last updated by Charles Cotton.
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