Why Offer Fringe Benefits?

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Company_Car“The salary’s £25k plus package.”

We’ve become accustomed to the package being worth anything up to half the salary. So what’s in it? And why is it important to offer anything in addition to the basic salary?

What’s in a Package?

‘Package’ is one name for staff, employment or fringe benefits. Typically the package contains pension contributions, healthcare, life insurance and other non-financial gifts. They’re gifts because nothing is expected in return and hence unlike salary, they are not part of an economic exchange.

Unlike companies in the United States, those in the UK have had to engage with the idea of offering non-financial gifts. This situation started in the 1970s and reached a crescendo in the early 2000s. The situation is more mature now that the HMRC have developed clear ideas about how much tax such ‘benefits in kind’ will attract. Today, there’s no great tax benefit from any such benefits but firms still feel compelled to provide them.

Be Competitive

Firstly firms must compete in the labour market for talent. If the norm for a particular industry is to provide a pension arrangement into which the employer pays generously, any firm not offering similar will have trouble attracting applicants – unless of course they offer a suitably generous alternative. A good example is the 19% pension contribution made to civil servants.

Buy Commitment

Secondly, benefits are a way of ‘buying’ employee commitment. And commitment is essential to enabling management intervention to motivation and cause performance. Employees can find that they are obliged to stay with a firm or that they need to stay because the costs of leaving are too high. An example is in training given. If an employee is funded through a qualification that increases their salary potential in the labour market, they may feel obliged to stay at least until the end of the training.

Minimise Lost Effort

Thirdly, some benefits directly benefit the firm. Permanent health assurance and healthcare insurance both act to ensure that key skills are not lost for long in the event of illness of either the employee or the employee’s spouse or children. So whilst healthcare engenders commitment by painting the employer as caring, hard economics also come to play.

And the Conclusion?

There are many other reasons for offering benefits. And of course, there are many other benefits. Which to offer and why would take some time to discuss.

The key issue is that benefits, packages or other gifts have become a way of life for UK firms. All managers must engage with the practice but managers must always be aware of why they are adding a particular benefit and what they hope that benefit will achieve. All benefits must have a positive return on investment for the firm, as well as the individual.

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