You are on page 1of 39

New CIPD report demonstrates how organisations can develop an employer brand that links strongly to employee reward

07 April 2010 Integrating your employer branding and reward strategy can help to position your company positively for the upturn. This is one of the conclusions from a new CIPD report, Employer Branding and Total Reward, produced in association with Mercer. The report draws insight from a survey of 44 organisations, a panel discussion and nine organisation case studies, including Abbey, Bacardi, Malmaison and Hotel du Vin, McDonalds, Midland Heart and tw telecom. Some of the implications for HR from the research are: As reward can influence employee behaviours it should be linked to behaviours that ultimately support organisation strategy Communication is a crucial way of reinforcing the employer brand as it raises awareness of the rewards offered by an organisation While financial rewards are important, non-financial rewards can also be key in reinforcing the brand It is important to check whether the reward approach is adding value to the employer brand. This can be done using HR metrics such as employee surveys or performance management data, as well as business metrics such as customer service or budget reductions. The report identifies emerging themes and examples of good practice and highlights those areas where approaches to interlink the employer brand with the reward offering have worked particularly well. It also addresses the challenges that companies have faced during their employer branding journey and how these can be overcome.

Charles Cotton, reward adviser, CIPD, says: There are many benefits that can be derived from
having a compelling employer brand that is supported by employee rewards, which is demonstrated in our interviews. Engagement can be enhanced by a brand that is demonstrably aligned to rewards as it provides an opportunity for companies to put their money where their mouth is in promoting desired corporate behaviours and image. Engaged employees who believe in the brand then promote the image more effectively to customers. Chris Johnson, head of Mercers human capital business comments: All participants in this research agree that aligning rewards with the employer brand helps in attracting, retaining and motivating staff. It demonstrates the employers financial commitment to the employer proposition, which in turn fosters a positive employee experience. In the long-term, branding and reward should become mutually supportive, ensuring authenticity within the organisation.


B&Q offers incentives for greener staff

Employees can train for new eco-adviser qualification Claire Churchard Publication date: 1 September 2010 Source: PM Online

DIY retailer B&Q has announced a programme of eco-incentives for its 30,000 staff to help them reduce their energy bills and carbon footprint. Under the plans the company said that each month it will offer a different discount for employees, which could save each person 140 and reduce their carbon emissions by 651kg.

Incentives for employees could include discounted energy-saving bulbs, insulation and energy-efficient thermostats.

In total, staff could save 4.2 million and more than 19 million kilograms of carbon dioxide a month, the company said.

An intranet forum has also been set up for staff to share green tips and stories. Cash prizes will be given out for the best eco ideas, and colleagues can nominate each other for an eco hero award for changes they have made to their home, community, workplace or lifestyle. More than 1,300 B&Q staff who sell eco-products will also be able to study for a new eco-adviser qualification, a City & Guilds Level 2 Diploma in Retail Skills. By upskilling its workforce, the employer aims to have an eco-adviser to help customers in every outlet by the end of this year. The programme has been launched as part of the Prince of Wales Start initiative, which was launched in February. Start aims to help people across the UK lead more sustainable lives. Euan Sutherland, chief executive of B&Q and Kingfisher UK, said: We want to make it easier for our colleagues and customers to green up their homes and we hope that our support of the Prince of Wales Start initiative together with the investment we are making in special discounts on eco products for our employees will mean that as many of us as possible will be able to make a start in our own homes.

How to... set up incentive programmes

If an employee incentive scheme is not done well, it can lead to demotivation and even resentment. Follow our steps and make sure your programme is a success Francis Goss

Publication date: 12 August 2010 Source: People Management magazine Page: 33

For an employee incentive scheme to work effectively, it must be relevant, measurable, open, fair and available to all. If not, it can have the opposite effect and lead to demotivation and even resentment. Many schemes fail because of poor communication by management, unrealistic targets and/or a lack of clarity around the process. For any programme to be successful, the participants must clearly understand what they have to do to be rewarded, how they will be measured, and what they will receive for achieving their set goals. Once it is established, it is important to continually reassess the effectiveness of the scheme and communicate any necessary changes promptly, clearly and concisely. When setting up an incentive programme, it is important to consider the following:

1 Decide who can participate Incentive programmes have historically been associated with sales initiatives, but all employees whose behaviour has an impact on the performance you are trying to drive should be considered, even if they do not come into direct contact with the customer.

2 Choose the right rewards Programmes should be tailored to the audience and rewards should be seen as aspirational. There is a danger that cash incentives can be confused with salary and bonus, and become expected each year. Vouchers are a good alternative, and can yield a cost benefit by buying in bulk. For an ongoing scheme, a points-based reward system may be more suitable, enabling employees to redeem their points against a choice of prizes. Non-cash incentives such as bespoke merchandise ranges, events and experience vouchers also give the flexibility for a scheme to be refreshed without having to increase the value.

3 Tailor your communication A variety of communication vehicles should be used and the media must be tailored to suit individuals in the scheme. For example, an initial email might introduce the scheme, supported by team briefings (depending on the environment) and posters and table talkers in breakout areas. Text messages are also an effective way of communicating with audiences who are frequently away from the office environment. Creating a buzz around the programme, both at launch and on an ongoing basis, will maximise engagement. Likewise, public presentations of awards won not only give a sense of pride for the recipient, but demonstrate that the goals are achievable and encourage others to participate.

4 Fix measurable goals Individual incentive goals should be aligned with overall company strategies. It is also important to think about the overall impact of the scheme, as people tend to do only those things that are measured and rewarded. Clearly defined objectives and measures will also avoid allegations of favouritism that might otherwise arise.

5 Ensure goals are achievable Performance goals should be challenging, yet achievable, otherwise the incentive may well have the opposite effect and become demotivating.

6 Track and publish progress Performance reporting needs to be regular and rapid so that participants can see what they need to do to earn reward. Incentive winners should be rewarded publicly to reinforce the value and purpose of the scheme. Measure pre-incentive performance levels against the post-incentive levels to see the impact on the business.

Key points
- Target all relevant employees. - Communicate before the launch and during the incentive for maximum engagement levels. - Set goals that are in line with company strategy, are clear, measurable, challenging, yet achievable. - Select aspirational rewards to suit the participants. - Ensure all progress is tracked and published.

Cipd Factsheet Employee benefits: an overview

Pay and reward

General Employee benefits Equal pay Incentive pay and bonuses Pensions Performance related pay Salary surveys
Revised March 2010
This factsheet gives introductory guidance. It:

outlines the recent history of benefit provision considers why employers may want to offer employees benefits examines some of the more common benefits offered by UK employers to their employees explores some of the issues around strategy, communication and implementation includes the CIPD viewpoint.

A brief history of employee benefits

Originally, employee benefits were (and are still largely) offered by employers for business reasons, moral reasons, or both. Some offered benefits because they believed that their organisation had a moral duty to look after their employees, a policy commonly referred to as paternalism. Such an approach developed from the mid-1800s and was popularised by Quaker-owned companies, such as Fry and Cadbury. Other employers saw providing a benefit as a good way of retaining their employees. However, these approaches are not mutually exclusive and many would have claimed that they provide benefits for both reasons. At the turn of the 20th century, the state started to bring in benefits for the population, and after the Second World War, the welfare state was established providing such benefits as unemployment insurance, sick pay and state pensions. Many of the benefits are universally provided as a safety net and many organisations built on this provision by offering their own pension or health arrangements to employees. During the 1980s, for political and economic reasons, the welfare state was reined back and many state benefits became means tested. Also around this time, employers started to adopt a more individualistic approach to how employees were rewarded, transferring more of the risk (and, potentially, reward) and cost of the provision to their workers. With pay, there was a move away from collective bargaining and service-related increments to performance-related arrangements, while benefit provision saw a shift from final salary pension schemes to money purchase plans and from fixed benefits to flexible and voluntary arrangements. At the same time, benefits were no longer regarded solely as a retention tool. Research in the 1990s showed that there were many factors in an organisations employment proposition that attracted,

retained and engaged their employees. And that what made them attractive depended on the individual employees circumstances, such as age, caring responsibilities, age, etc. This led to the concept of total reward, that organisations should adopt a bundle of mutually supporting financial and non-financial rewards (such as flexi-time or home working) that are aligned to the needs of the organisation and its employees. Such an approach has led many employers to regard employee benefits as a strategic tool to help align employee behaviours with business objectives by using them to attract, retain and engage the talented individuals that they need now and in the future. Our factsheet on total reward has more information on this topic.

Go to our factsheet on Total reward

A recent development in benefit provision is the concern among some employers about whether their employees are in a position to adjust to this new benefit landscape where they shoulder more of the risk (and reward). There is a belief that if employers are going to give employees more freedom and choice they also have a moral duty to help educate employees about the possible consequences of their benefit choices and to help them make better informed decisions around what level of savings or health coverage they will need throughout their employment lifecycle. Employers considering whether there is a business case for them to offer generic financial advice (or financial education) to their employees should see our Workplace financial education report.

Go to our report on Workplace financial education

Cash or benefits?
Some employers decide that rather than offering employee benefits, they will provide extra cash instead and employees can use this to buy those benefits that best reflect their individual circumstances. Such an approach, often referred to as clean pay, is easily communicated, understood and administered. However, on the downside, it has no retention factor and staff could:

end up spending more money buying their own benefits than it would have cost the firm to buy on their behalf spend work-time hunting around for the best deals make bad decisions expect a certain benefit to be provided.

Additionally there are some benefits that are tax-advantaged. While clean pay may not suit all organisations, employers should consider whether, given their particular circumstances, it makes business sense to spend resources providing benefits to employees or it should let employees make their own arrangements. There are a number of tax-advantaged benefits that it may be worth employers consider providing:

Pensions staff can obtain income tax relief at their highest marginal rate and employers are able to offset the contributions against corporation tax. However, currently, there are proposals to restrict pension tax relief for those with higher incomes. Many firms are considering salary sacrifice arrangements for their occupational pension schemes (see below). To encourage employees contributing to the occupational pension scheme, some employers match what their employees pay in. Others link their contribution levels to employee length of service as a way of rewarding employee loyalty. There a number of occupational pension arrangements for more information see our factsheet on occupational pensions and our research concerning the business case for pensions in the private sector.

o o

View our Occupational pensions factsheet Go to our research on the business case for pensions

Childcare vouchers employers can give up to 55 a week in vouchers and be exempt from paying any national insurance contributions (NICs) on that sum.Any associated childcare voucher administration costs incurred are also exempt. The employee does not have to pay any NICs and income tax on the vouchers provided. Home computing initiative (HCI) this government initiative was scrapped in April 2006 but employers with such arrangements in place before that date can still operate them until their scheme ends. Bicycle loans employees can save up to half the cost of bicycle and accessories for commuting to work. The firm buys the bicycle and leases it to the employee and at the end of the lease period the employee can buy it for the price of a months lease. (In addition, employers can also provide tax-free meals and drinks to those who cycle to work). Other tax free benefits include: season ticket loans, worth up to 5,000 to cover the cost of public transport; an annual party, worth up to 150 per head; and independent financial information, worth up to 150 per employee.

Salary sacrifice
Salary sacrifice is where an employee gives up part of their gross salary due under their contract of employment and in return their employer agrees to provide a benefit. For instance, under a pension salary sacrifice scheme the employee sacrifices part of their pay, in return, their employer makes an equivalent contribution to the pension. This way the employee saves on income tax and both the employer and employee saves on the NIC. The employer can use the NIC savings to run the sacrifice scheme or to top up the employees pension. Our 2008 reward management survey finds that 29% of employers operate salary sacrifice for their employees pension schemes. Employers within the private sector are more likely to have adopted such an arrangement, as are those with more than 5,000 employees. Around half of employers operating salary sacrifice pass on their NIC savings to their employees while the remainder retain it.

See our annual reward surveys

Salary sacrifice may also be used for other benefits, such as childcare vouchers. However, organisations will need to consider the implications for employees and the impact on their entitlements to working tax credit, child tax credit, state pension and maternity pay. There are also national minimum wage implications. For more information visit the HM Revenue & Customs (HMRC) website (see the Useful contacts section below).

Holidays and time off

By law, employees and workers are entitled to 28 days paid annual holiday though many organisations have paid holiday entitlements above the minimum level. Currently, there is no statutory right to paid leave on bank or public holidays; it depends upon what is provided in the contract of employment. Employees are also entitled to other types of time off work including maternity, paternity, adoption and parental leave, time off for public duties such as jury service, time off for trade union duties, and time off for study or training. In many cases there are qualifying conditions and most rights apply only to employees, though some extend to workers. As with holidays, employers often provide more generous entitlements than required by law. For more information on holidays and time off, see our factsheet which gives an overview of work hours and holidays.

Go to our factsheet on Working time and leave

Healthcare and group risk-benefits

These are paid for and provided by employers to ensure both the welfare and productivity of their employees. The more common types identified by our recent research:

occupational sick pay: many employers provide sick pay that is more generous than that is provided under the states statutory sick pay scheme. private medical insurance (PMI): most employers offer this benefit typically restricting it to senior employees. It allows key individuals to be treated, recover and return to work from a medical complaint a lot quicker than they would have been if they went via NHS, so minimising the disruption to the organisation of a medical-related absence. life assurance: pays out a lump sum to a dependant on the death of an employee before retirement. permanent health insurance (PHI) or long-term disability (LTD) : provides a replacement income, as a proportion of salary, to employees who are off work through long-term illness between leaving employment and normal retirement age. The award is subject to a medical report and usually offsets state incapacity benefit. critical illness insurance (CII): similar to PHI, but instead provides a lump sum to the claimant that is supposed to cover them until they retire. From an employee perspective, CII can be more useful that PHI if they have a terminal condition. From an employer perspective, unlike PHI, CII provides a clear break with the claimant. employee assistance plan (EAP): is a confidential helpline for employees who have work or home related problems. Our reward management survey has noted a growth in EAPs due to concerns about employee absence and stress management. However, this expansion may slow down if HMRC decides to tax them. dental insurance: is one of the fastest growing benefits according to our latest reward survey.

Company cars and cash allowance

Many organisations provide employees with a company car, either because the job needs it (for example, a district nurse) or as to recognise the status (job, grade or salary level) of the employee (for example, HR director). Such vehicles are taxed by the HRMC according to vehicles CO 2 emissions. The popularity of the company vehicle has suffered with the shift in the basis of taxation from mileage to carbon dioxide emission. However, recently, due to corporate manslaughter issues, employers have decided to reduce and manage this risk by moving back to company car provision - see our factsheet on company cars for more information.

Go to our Company car policies factsheet

Voluntary and flexible benefits

Just over one quarter of employers offer their employees access to a voluntary benefits plan. Under such an arrangement, employers give their staff the opportunity to purchase from their post-tax income third party goods and services at a discount rate. At present, our research reveals that they are popular with larger, private sector employers. Organisations can either organise and publicise the discount arrangements themselves, or outsource it to a third party. Increasingly, employers are allowing employees to salary sacrifice to take advantage of government-backed initiatives such as childcare vouchers. For more information see our factsheet on voluntary benefits.

Go to our voluntary benefits factsheet

By contrast, a flexible benefit scheme is any arrangement that gives employees a choice over the mix of cash and for benefits they receive from their employer. Unlike benefits provided under a voluntary scheme, benefits under a flexible scheme are paid for by the organisation. Unlike benefits that are flexible (such as buying or selling holiday entitlement), flexible benefits allow staff to flex between three or more benefits (such as trading down on a company car and trading up on holiday entitlement). Just over one in ten employers offer this type of arrangement, however they are far more prevalent among larger, private sector, organisations where the administration and technology costs are more manageable. For more information see our factsheet on flexible benefits.

View our Flexible benefits factsheet

Given the potential for NIC and tax savings to both the employee and the organisation to be gained from these types of salary sacrifice arrangements, it is surprising that such schemes are not more widespread.

Strategy, design, communication and launch

Before organisations consider introducing new benefits, it is important to consider:

Why are you doing this? How does it support the business goals of the organisation? How does it reward the values and behaviours that the organisation need? How does it fit into the HR and reward strategy? Does it support the people management and development practices that your organisation requires to be successful? Would employees value the change? Have you researched employee views? Have you sought their opinion on the changes? How is the benefit going to be launched? How is it going to be communicated? Who are the key stakeholders and how are they going to be involved? Does the launch and communication team have the required skills and knowledge? What is the message? How will you explain what is being introduced and why to employees and their front line managers? How will you educate them in how the benefit will work and what they need to do? How will the benefit be communicated on an ongoing basis to existing and potential employees? If you have developed an implementation and communication plan for the introduction of the new benefit, how flexible is it to changes in the business environment? What are the factors that you will assess whether the benefit is successful in supporting the organisation? What measures and targets will you use on an ongoing basis to review its applicability?

When it comes to staff benefits, research shows that the better they are communicated, the more staff appreciate them. CIPD research shows that most communication activity still takes place at the recruitment, selection and induction phase. However, those organisations that are adopting a total reward approach communicate on an ongoing basis via paper or online benefit/total reward statements as well as via email, workshops and presentations. That way employees are aware of the benefits on offer and appreciate and value them according to their individual circumstances and needs. Unfortunately, it appears that more resources go into the design of the benefit and too little attention is given to how it will be communicated at launch and on an on-going basis.

CIPD viewpoint
Employee benefits should be provided to support the business goals of the organisation by attracting and/or encouraging the behaviours and values that it needs to be successful attract, recruit and engage. Organisations need to examine what their existing and future employees need and want and how best they can meet these. Once this has been established, and the appropriate benefits selected and provided, employers need to:

communicate, on an ongoing basis, to their employees what is being provided and why so that employees are aware of the benefits and appreciate and value them consider whether employees have the right knowledge, skill and attitudes to make informed decisions and whether they need to foster financial awareness establish targets and measures against which to assess how well the benefit is supporting its aims and objectives and so it can make any necessary adjustments.

Further reading
CIPD members can use our Advanced Search to find additional library resources on this topic. They can also use our online journals collection to view selected journal articles online. People Management articles are available to subscribers and CIPD members on the People Management website. CIPD books in print can be ordered from our online Bookstore.

Books and reports

CORBY, S., PALMER, S. and LINDOP, E. (2009) Macmillan.

Rethinking reward. Basingstoke: Palgrave consequences

PERKINS, S.J. and WHITE, G. (2008) Employee reward: alternatives, and contexts. London: Chartered Institute of Personnel and Development. WHITE, G. and DRUKER, J. (2009) Reward Routledge.

management : a critical text. 2nd ed. Abingdon:

Journal articles

ATTWOOD, S. (2009) Benefits and allowances 2009: survey overview. Review. No 923, 12 June. 6pp. PEGG, T. (2009) Creating engagement through employee benefits. No 2, pp5-12. SIVASUBRAMANIAM, K. (2009) A matter of balance. February. pp22-24.

IRS Employment

Strategic HR Review. Vol 8,

Payroll and Human Resources. Benefits. July. pp34-35,37-38.

WASHINGTON, T. (2009) Changing measures. Employee


This factsheet was written and updated by CIPD staff.


Total reward
Pay and reward

Revised June 2009

This factsheet gives introductory guidance. It: introduces the idea and components of 'total reward' considers the perceived problems of a total reward scheme gives the CIPD viewpoint. By recognising that pay is not the only motivator, and acknowledging the importance of not only tangible but also intangible rewards within the wider context of the work experience, total reward has wide-reaching implications for employers and employees alike. Total reward is potentially very powerful in assisting employers align their HR and business strategies with employee needs, to improve performance. As a concept, total reward is not new. However, the latest of our annual reward management surveys finds that only around two in five employers have adopted this approach so far. However, a further 22% claim that they plan to introduce total reward in the next 12 months.

Go to our reward management survey

A definition
Total reward is the term that has been adopted to describe a reward strategy that brings additional components such as learning and development, together with aspects of the working environment, into the benefits package. It goes beyond standard remuneration by embracing the company culture, and is aimed at giving all employees a voice in the operation, with the employer in return receiving an engaged employee performance.

Components of total reward


An analysis of various total reward models by Thompson 1 finds that they can be characterised by an approach which is: Holistic: it focuses on how employers attract, retain and engage employees to contribute to organisational success using an array of financial and non-financial rewards. Best fit: it adopts a contingency approach - total reward programmes need to be tailored to the organisation's own particular culture, structure, work process and business objectives. Integrative: it delivers innovative rewards that are integrated with other human resource management policies and practices. Strategic: it aligns all aspects of reward to business strategy - total reward is driven by business needs and rewards the business activities, employee behaviour and values that support strategic goals and objectives. People-centred: it recognises that people are a key source of sustainable competitive advantage and begins by focusing on what employees value in the total work environment. Customised: it identifies a flexible mix of rewards that offers choice and is better designed to meet employees' needs, their lifestyle and stage of life. Distinctive: it uses a complex and diverse set of rewards to create a powerful and idiosyncratic employer brand that serves to differentiate the organisation from its rivals. Evolutionary: it is a long-term approach based on incremental rather than on radical change.

Extent of total reward in the UK

In 2008, around half of employers in our reward survey have adopted or are implementing a total reward approach, with a higher proportion among larger private sector firms.

Organisations that have adopted (or are in the process of adopting) a total reward approach, by sector and size

Percentage of organisations All 42 By sector: manufacturing and production private sector services voluntary services public services By size (no. of employees): 0-49 50-249 250-999 1,000-4,999 5,000

38 48 40 33

31 32 43 52 61


Source: our survey Reward

management survey 2009

Why are employers considering total reward at the present?

Both new and old-economy companies are currently having to rethink their reward strategies. Traditional companies had a paternalistic approach to reward; one benefit for employees was that they could be relatively confident of staying with the same employer for as long as they wished, possibly for their entire working careers. Newer companies (particularly those in the hi-tech sectors) rewarded employees with exciting and challenging surroundings, but with no guarantee of job security. They also offered significant financial rewards, in the form of stock options. Now that the stock options have to be expensed on the profit and loss account, and the traditional companies have stopped providing a job for life, both have to look at new ways of attracting and retaining key personnel. Demographic changes have resulted in a more diverse workforce demanding different returns from work. Total reward is a mindset that enables employers to look at the bigger picture. Flexible benefits are important but are seen by many as little more than an extension to the existing salary package and something, therefore, that can be matched by rival companies. To obtain maximum effect from these benefits, they have to become part of a bigger business strategy. See our factsheet on flexible benefits for further information on this topic.

Go to our factsheet on Flexible benefits

At present, pay and benefits may be covered under a single, and controllable, flexible benefit scheme, but the employer is still faced with the prospect of having to meet demands for a wide range of other benefits including better office equipment or more learning and development opportunities. In a fully integrated total reward package all the elements of the employees work become part of a single flexible package. It is only when all the elements of the reward package (that is, total rewards) are considered within the context of business and HR strategies that the total cost of each employees job can provide the most valuable return to the organisation. Thus total reward links cost control with the demand by employees for greater choice and flexibility in the workplace. It also offers employers the opportunity to differentiate and create cultural brand, and thence competitive advantage; it is hard to replicate.

Total reward in relation to the work experience

The US organisation WorldatWork identifies five separate components of the work experience. These are: recognition work/life balance company culture employee development environment, including job design and the physical workspace. Although these elements have always existed in the workplace, they have often been taken for granted and thus not actively managed. Under a total reward policy, all aspects of the work experience are recognised and prominence is given not only to remuneration but also to less tangible rewards. This is important since experience shows that employees place great emphasis on intangible rewards when deciding where to work and the level of commitment to give to their work.

What might be included in a total reward scheme?

Broadly, total reward encompasses pay and benefits (generally in the form of a flexible benefits


scheme), the working environment, and career and personal development. In more detail it may include some, or all, of the following elements: flexible benefits access to professional and career development a challenging role at work freedom and autonomy at work opportunity for personal growth recognition of achievements preferred office space being able to raise matters of concern being involved in decisions that affect the way work is done preferred office equipment and mobile phone flexible working hours home or teleworking secretarial support. Clearly some of these rewards are more easily provided than others, and some are more quantifiable than others. One difficulty in a total reward package, beyond the challenge of supplying these less tangible rewards, is attempting to balance them against one another.

What are the perceived advantages of a total reward scheme?

According to Thompson1, the benefits that flow from a total reward scheme are: easier recruitment of better-quality staff reduced wastage from staff turnover better business performance enhanced reputation of the organisation as an employer of choice.

What are the perceived problems with a total reward scheme?

Total reward may be regarded as the next logical step after flexible benefits have been implemented. As only relatively few companies in the UK are successfully operating flexible benefits schemes at present (though many are considering such schemes), the number that could even contemplate introducing a total reward scheme is even smaller. As with other reward solutions, no off-the-shelf package is available for companies simply to plug into their operation. To develop an appropriate programme would be enormously complex and would not be without risks in its implementation, so it is an area that would almost certainly benefit from help provided by consultants. Within the field of total reward, there is currently serious debate over where to draw the line between choices related to personal needs (such as life assurance) and choices that are strictly businessrelated (such as the choice of office equipment). Clearly, existing flexible benefits schemes already have grey areas, such as holidays, where the employees decision is not without an impact on the rest of the organisation. But when it comes to choosing, say, a computer, some employers (and experts) believe that this is not an appropriate area for employee choice but should be a purely business decision. Similarly, the choice of office accommodation may occasionally lend itself to a trade-off where limited office space is rationed according to who is prepared to sacrifice other benefits in order to obtain it, but (unlike, for example, life assurance) office accommodation is a finite and not particularly flexible resource. In this case, it would often be very difficult to meet everyone's requirements, regardless of how much they were prepared to sacrifice by way of other benefits.


Total reward practice

Our survey Reward management 2005 reveals that employers believe that they are better at integrating the financial aspect (pay and benefits) into a total reward approach than the non-financial aspects (learning and development, work-life balance, and other financial rewards). An area of concern revealed by the reserach is line manager behaviour, with employers expressing concern at how well they have integrated the behaviour of these staff within a total reward approach. Yet, if line managers are not going to support the organisationss commitment to total reward, for example, over flexible working, the approach is likely to fail.

View our 2005 Reward management survey

The aim of total reward is to encourage more positive employee commitment without incurring openended operational costs. The concept is not about transferring the burden of decision-making over items such as office accommodation or technology onto employees but about empowering employees to tailor their work and surroundings to meet their own needs, while allowing the company to keep control of costs. Although a fundamentally simple concept, total reward is difficult to put into practice. This should not, however, prevent further exploration of the ideas behind this approach, with a view to implementing at least some of its principles when possible.

CIPD viewpoint
CIPD takes the view that total reward is a developing management practice that is fairly simple to understand but very complex in operation because it has wide reaching implications for approaches to reward management and for cultural change in organisations. It is an exciting leading edge concept that focuses on employee empowerment rather than employer command management. Total reward has the possibility of being a very powerful management tool and change catalyst.

Useful contacts

World at Work: the Professional Association for Compensation, Benefits and Total Rewards (formerly the American Compensation Association)
THOMPSON, P. (2002) Total reward. Executive briefing. London: Chartered Institute of Personnel and Development. Summary available at:

Further reading
CIPD members can use our Advanced Search to find additional library resources on this topic and also use our online journals collection to view journal articles online. People Management articles are available to subscribers and CIPD members in the People Management online archive. CIPD books in print can be ordered from our Bookstore


Books and reports

ARMSTRONG, M. and BROWN, D. (2006) Strategic reward: making it happen. London, Kogan Page. PARRY, E. (2008) Managing an ageing workforce: the role of total reward . Research insight. London: Chartered Institute of Personnel and Development. Available at:
Journal articles

CHEN, H-M. and HSIEH, Y-H. (2006) Key trends of the total reward system in the 21st century. Compensation and Benefits Review. Vol 38, No 6, November-December. pp64-70. CHRISTOFFERSON, J. and KING, B. (2006) The 'IT' factor: a new total rewards model leads the way. Workspan. Vol 49, No 4, April. pp18-19,22,24,26-27. GRAHAM, M. (2005) The rewards of total rewards. Workspan. Vol 48, No 11, November. pp32,34-35. SEJEN, L. (2006) Total rewards: 10 steps to a more effective program. Workspan. Vol 49, No 4, April. pp36-39.

This factsheet was originally written by Jean Richards, edited by Clare Hogg of Helios Associates Ltd and has been updated by CIPD staff.


Cipd factsheet Flexible benefits

Pay and reward

General Employee benefits Equal pay Incentive pay and bonuses Pensions Performance related pay Salary surveys
Revised June 2009
This factsheet:

reviews the advantages and disadvantages of flexible benefits schemes considers how a scheme should be organised and communicated look at the benefits that might be included gives the CIPD viewpoint.

The basics
Many organisations have always allowed a limited form of flexibility for just one or two benefits, but it is only within the last five years that comprehensive flexible benefits schemes have started to become more common in the UK. Although generally welcomed both by employers and employees, flexible benefits schemes have often been avoided because of the cost of introducing and administering them. Our 2008 reward management survey finds that just over one in ten employers were using this type of reward with flexible benefits generally only evident in organisations with over 5,000 employees and within the private sector. This years survey predicts that a further 12% of employers will be adopting a flexible benefits plan within the next 12 months, though again, it is typically larger, private sector employers.

See our latest Reward management survey

Flexible benefits schemes (also known as 'cafeteria benefits' or 'flex plans') are formalised systems that allow employees to vary their pay and benefits package in order to satisfy their personal requirements. They are not the same as voluntary benefits schemes (where employers arrange bulk discounts with external providers) or net pay schemes (where employees pay for extra benefits), both of which have been used for several years. Under true flexible benefits schemes, the dividing line between pay and benefits becomes less rigid than in standard reward packages. In most schemes, employees are able either to retain their existing salary and simply vary the levels of benefits within their allowance, or else to adjust their salary up or down by taking fewer or more benefits respectively.


Why introduce flexible benefits?

Organisations generally decide to introduce flexible benefits schemes as part of a wider move towards a more flexible working environment. Such a scheme will also increase the perceived value of the reward package offered to employees, at no additional cost to the organisation.

Advantages of flexible benefits schemes

Employees choose benefits to meet their needs, and value these benefits more highly. Employers and employees share the responsibility for providing benefits. During periods of change (including merger and acquisitions), flexible benefits can help to harmonise rewards. Employers provide benefits at a known cost that is fixed regardless of the choices that employees make., so allowing them to cap future benefit costs. Employees have a true idea of the full worth of the benefits package they receive and employers do not provide benefits that are not valued. Employees are given a sense of control and involvement by having a choice. Dual career couples avoid having benefits duplicated by their respective employers. Employers are seen to be more responsive to the needs of an increasingly diverse, demanding and ageing workforce. A competitive benefits package is valuable in attracting and retaining key personnel. The awarding of benefits such as company cars becomes less divisive. Employers' demands for flexible working practices are more justifiable if employees enjoy flexible benefits. Helps to align the total reward strategy to the HR and business strategies.

Disadvantages of flexible benefits schemes

Employers find them complex and expensive to set up and maintain (although new technology is reducing both the cost and administrative burden). The choices made may cause problems both to employers and employees (see below under 'Deciding on the amount of flexibility').

Defining the strategy

Before drawing up a flexible benefits plan, it is important to consider fully the reasons for adopting this approach. If, because of the nature of the organisation, only a limited amount of flexibility is possible, then it may be better to save the time and expense of introducing a full flexible benefits scheme and instead consider a more limited approach. This might include allowing cash alternatives to company cars, or giving employees the ability to buy or sell holiday. Alternatively, it may consider total reward benefit statements or. voluntary benefits. For more information on voluntary benefits, see our factsheet on that topic.

Go to our Voluntary benefits factsheet

Any new scheme should be considered within the context of the existing reward strategy and should assess the motivational as well as the financial value of both current and future benefits. Typically it will take at least 12 months to design, implement and communicate a flexible benefits plan.


Organising the scheme

Most flexible benefits schemes are initially based on the existing benefits provision which is used to construct a new package. Certain benefits, such as sick pay and maternity benefit, ought to remain outside the scheme. Some employers also prefer to exclude pensions from flexible benefits. The employee is given a benefit allowance and a list of available benefits. Employees are advised of the current level of their benefits and 'cost' of buying or selling these to suit their individual needs. There is typically a limit set on how much of the salary can be used to buy extra benefits and equally there is a baseline of benefits that must be kept and therefore to the extra salary that can be obtained by selling benefits.

Cash or points?

Some schemes show each of the benefits with a cash value and the employee uses this as the basis for calculating the effect of changes. The advantage of showing a cash value is that it gives employees an idea of what the benefit is truly worth and the cost that the employer is bearing. The danger of a cash system is that it may encourage employees to feel that they are being forced to buy benefits out of their own salary. Other schemes use a points plan, where each benefit has a points rating and the employee has an allowance of a certain number of points. Regardless of whether a points or a cash value scheme is used, all schemes make a clear distinction between notional salary and the final value of salary that is actually paid in the year (regardless of whether this is higher or lower than the notional salary). The notional salary continues to be used as the basis for items such as pension calculations and salary reviews.

Deciding on the amount of flexibility

When schemes are being introduced, it is important to estimate the likely take-up of specific benefits. This will enable employers to obtain the most accurate possible quotations for the provision of each benefit. One problem associated with the introduction of flexible benefits is that the process of making selections actually changes the profile of the group requiring a particular benefit. All schemes are costed on the basis of predicted selections; where employees make significantly different choices, these are regarded as 'adverse selections'. For the success of the scheme, the relative values of the benefits should be set so as to avoid too many adverse selections. They should also be arranged such that employees are not encouraged to make imprudent selections that will jeopardise their own security provision. The inclusion of core benefits guarantees a minimum level of protection. There must be a compromise between excessive flexibility that encourages inappropriate choices and too narrow a choice that does not meet the employees' expectations. Before implementing a flexible benefits scheme organisations may find it worthwhile to survey their employees as to the type of benefits they favour and value. This would also assist in maximising the value of the package to both employer and employee.

Choosing and changing benefits

Once the scheme has been agreed, the choice of benefits is presented to the employees. To ensure a positive reception, it is important that the choices (and the implications of those choices) are clear. If the options are too complicated, or the method of making the choices is perceived as being difficult,


then employees will simply default to their existing benefits package and much of the time and money spent in introducing the scheme will have been wasted. Many of the computerised systems that are used for administering such schemes include an option that allows employees to model their own choices. Various selections can be made until the employee is satisfied with the outcome. Most schemes allow for changes in benefit selection to be made by a fixed date, once a year. Prior to this date, employees are sent a personalised document reminding them of their current selection and benefit allowance for the forthcoming year, and giving them the opportunity to amend the selection. It is important that this document is simple to use with the costs of the options laid out clearly. If the document is not returned by the specified date, the benefit package will typically remain at the previous levels or default to a standard package. Organisations should consider how to deal with those staff who will be off work during the selection period, for example on maternity leave, on extended holiday or secondment. Schemes may restrict the amount of change between one year and the next. Typically if there are several levels of available benefit, employees may only alter benefit by one level at each renewal. In addition, benefits (such as life assurance) for a spouse or partner may not exceed those for the employee. Although reviews take place annually, most organisations will allow changes to be made to the selection outside the normal renewal dates in exceptional circumstances. These typically include:

marriage or divorce birth or adoption of a child death of a dependant long-term sickness absence promotion.

Who should be included in the scheme?

Early schemes were often only for senior employees (because they received more benefits and also represented a small proportion of the workforce), but this tended to be divisive. Many companies who have flexible benefits schemes now offer them to all permanent employees. If the wider workforce is to be included in the scheme, it is important that any pilot should be based on a representative sample of the final spread.

Tax and National Insurance implications

The tax situation for benefits is complex and collection methods vary between organisations. Some benefits (such as life assurance) attract no tax whereas others are regarded as benefit in kind and are taxed accordingly. Depending on the arrangements that an employer has made with the Inland Revenue, these benefits may be taxed at source, through an amended tax code or through the end-ofyear P11D. It is important that the tax implications of any selections are made clear to employees.

Contents of flexible benefits schemes

Although there is no such thing as a typical flexible benefits scheme, there are certain benefits that appear in most. Many schemes differentiate between core benefits, some parts of which are financed by the employer, and voluntary benefits, which are paid for by the employee. The core benefits are


those that a best-practice employer might be expected to provide and which, though the employee might adjust them, may not be entirely removed from the package.

Core benefits in a typical scheme

The contents of any scheme depend on local circumstances, but core benefits that appear on many schemes are:

holidays life assurance private medical insurance critical illness insurance / long-term disability insurance personal accident insurance.

Other benefits that may be included

The number (and type) of benefits in a scheme is a compromise between offering employees a wide choice and keeping the administration manageable. According to our latest reward management survey, other than pensions, the most common benefits that appear in existing schemes include:

dental insurance (9%) childcare vouchers (6%) critical illness insurance (5%) cycle to work scheme (5%) health screening (5%) private medical insurance (5%) healthcare cash plans (4%) permanent health insurance (3%) life assurance (3%) gym (2%)

Communication and education

The most important elements in ensuring the success of a flexible benefits scheme are effective communication and education. If employees are made aware of the reasons for, and benefits of, introducing flexible benefits they are less likely to dismiss the scheme as simply a means of reducing costs. In general new schemes are more likely to succeed if they are introduced on a cost-neutral basis (ie no overall gain to either side). Before setting up a new scheme it is advisable to consult employees over what type of benefits they would like to be offered. All suggestions should be given fair consideration, but care should be taken not to encourage undue expectations that it will be impossible to meet. By incorporating the views of employees, the scheme is more likely to receive a positive welcome. Once the scheme is in place, good communication is still essential so that employees are able to understand fully the benefits offered, and make appropriate choices. For instance, pharmaceutical firm Astra Zeneca adopted a phased approach when it brought in its flexible benefits scheme. They began with 'awareness' for six months, followed by 'engagement' for a further three months, and then 'enrolment' for another three months, with the full embedding of the policy by the end of a year.


Examples of communication methods

As many means as possible should be used to communicate the details of the new scheme. Possible methods include:

road shows and open days intranet, including bulletin boards videos, CD-ROMs newsletters individual letters to employee's home address meetings, Q&A sessions, focus groups demonstrations with computer modelling telephone and e-mail helplines one-to-one consultations.

Flexible benefits and anti-age discrimination legislation

There is currently no exemption for employers that allows them to make distinctions between employees of different age groups in providing insurance related benefits, such as private medical cover, income protection and life cover. There may be scope for a challenge if the availability and cost to employees of such benefits under a flexible benefit scheme is dependent on their age. For more information on the age discrimination legislation, see our factsheet on age issues in the workplace.

Go to our Age and employment factsheet

CIPD viewpoint
Flexible benefits are a hot topic, fitting in well with the wider total reward debate and talk of the mass customisation of reward. As a practice, flexible benefits are set to increase as new software becomes available and the cost of implementation decreases allowing more organisations to set it up. Flexible benefits are seen as an ideal way of addressing diversity in benefits, as reinforcement of cultural change, harmonisation of reward practices, especially during merger and acquisition, and an effective means of cost management. But they are not a 'magic' solution and need to be managed as part of an integrated reward strategy with clear goals and excellent support processes.

Books and reports

HUTCHINSON, P. (2008) Flexible benefits: creating competitive into practice. London: Chartered Institute of Personnel and Development.

advantage . Research



COLEMAN, A. (2007) Brand new thinking. Employee Benefits. August. pp48-49,51. DONOVAN, K. (2007) Made to fit? Employee Benefits. February. pp.51-52. GLEW, A. (2007) Be flexible but firm. Human Resources. February. pp51-52. HUTCHINSON, P. (2008) How to implement a flexible benefits scheme. People Management. Vol 14, No 5, 6 March. pp44-45. This factsheet was originally written by Jean Richards, edited by Clare Hogg, of Helios Associates Ltd and subsequently updated by CIPD staff.

Voluntary benefits
Pay and reward

Revised January 2009

This factsheet gives introductory guidance. It:

explains what is meant by the term voluntary benefits (VB) and the rationale behind this approach outlines current trends in respect of coverage of VB schemes and the products and services included examines how employers implement VB schemes looks at the pros and cons of this type of benefit includes the CIPD viewpoint.

What are voluntary benefits?

Voluntary benefits (also known as affinity benefits) are those products and services that are available through an employer for purchase by employees, usually at a discount, out of their own taxable income or sometimes via salary sacrifice arrangements. More information about employee benefits generally can be found in our overview factsheet on that topic.

Go to our factsheet on Employee benefits

The products and services available under VB schemes may be broadly grouped into three categories:

Health benefits for example discounted health checks and eye testing or private medical insurance Financial benefits such as additional voluntary contributions to pensions schemes or discounted household or holiday insurance Leisure/lifestyle benefits with examples including offers on gym membership, holiday offers, discounted shopping in stores or online or childcare vouchers.


Flexible benefits (or flex) schemes, which also enable employees to choose from a range of benefits, differ from VB schemes as the employer, rather than the employee, pays for the cost of the benefits. Under VB schemes, the employer does not pay for the benefits provided although some costs may be incurred, for example in respect of the time spent researching suppliers of services or for administration fees. The employer simply arranges provision of the products or services, often using its size as a leverage to negotiate discounted rates, and employees choose to pay for them if they so wish. This is sometimes done via payroll and this is particularly important in the case of benefits attracting tax breaks where salary sacrifice arrangements apply (see below). In practice, voluntary and flexible benefits schemes are often used on a complementary basis. Employers that offer a flex scheme to the workforce typically also offer a supplementary package of voluntary benefits. It is also often thought useful for firms contemplating the introduction of flex to begin by offering benefits on a voluntary basis albeit in some cases the planned move to flex never actually materialises. The idea is that this allows firms to test the water in terms of the relative popularity of various benefits and helps them design and fine-tune their subsequent flex provision more accurately. For more information on flexible benefits, see our factsheet on that topic.

View our factsheet on flexible benefits

The main aim of voluntary benefits schemes is to enable access to additional employee perks which, as part of an overall package, can help enhance motivation and/or recruitment and retention at little or no cost to the employer. For employees, the approach helps ensure a greater degree of choice and flexibility over their benefits package by providing them with access to a range of discounted products. Moreover, certain benefits are free of tax and/or national insurance when provided by an employer, hence in some cases, it is possible to use salary sacrifice arrangements to maximise the benefits. In this scenario, an employee voluntarily gives up entitlement to a portion of their salary in return for a benefit. Examples include the provision of childcare vouchers, which are free of tax or NI up to a weekly limit when provided by an employer.

Coverage of schemes
The CIPDs latest annual reward management included some interesting results on the extent to which employers operate VB schemes:

Over a quarter (28%) of employers offer VB to their workforces, compared with just 10% in the case of full flex schemes. The overall figure masks wide variations according to the size of firms, with VB provided by just 12% of those organisations employing fewer than 50 people, compared with 59% of those with over 5,000 employees. There are also distinct variations by sector with the incidence of VB ranging from just 10% in voluntary sector organisations up to 39% in private sector services. The popularity of this approach looks set to rise further, with 15% of employers in the survey reporting that they planned to introduce VB arrangements in the year ahead.

See the full results of our annual reward management survey 25

Options included in VB packages

Currently, a picture of VB provision emerges where health benefits are among the options increasingly offered by employers and with pensions continuing to ride high in the popularity stakes. The journal/website Employee Benefits conducts a two-yearly survey of voluntary benefits provision, which includes some useful details about trends in provision. According to its 2007 research covering practice in 501 employing organisations1, the most commonly offered options under VB schemes are:

private medical insurance (72%) life assurance (69%) additional voluntary contributions to a defined benefit or money purchase pension scheme (68%) group personal pension plan (66%) gym membership (62%) healthcare/hospital cash plan (61%) discounts for local retailers or leisure activities (56%) leisure/entertainment services from national providers (for example, theatre tickets) (53%) legal advice/helpline (52%) season ticket loan (50%) retail products (for example, electrical goods or CDs) (50%) travel insurance (48%) stakeholder pension (48%) retail/leisure vouchers (47%) dental insurance (46%) own organisations products or services (44%) income protection/permanent health insurance (43%) debt counselling/helpline (43%) health screening (42%) personal accident insurance (40%).

Clearly, options that are available under salary sacrifice arrangements are particularly valuable to an organisation and its employees. Where VB options are on offer via salary sacrifice arrangements, the most popular options in 2007 were found to be:

childcare vouchers (92%) pensions contributions (49%) bicycle loans (46%) mobile phone loans (8%) food in on-site restaurants (5%) bus travel (4%).

How employers implement schemes

VB schemes may be implemented in a variety of ways according to the needs of the organisation and its employees. The key choices and factors for consideration are outlined below. However, there are some common themes for all employers, including the need to ensure innovation and effective communication when implementing VB arrangements.


Broad-brush versus the tailored approach

One of the fundamental decisions facing employers implementing VB schemes concerns the quantity of benefits on offer. A choice must be made between a broad-brush approach (that is, providing as wide a range of benefits as possible) as against a more tailored approach involving fewer benefits. If the broad-brush approach is taken, the idea is that employees are likely to appreciate the plentiful choice that is available. But it is possible that a scheme that is too general may lose some effectiveness or that employees may feel overwhelmed by the large number of options that are available. In practice, a typical scheme might offer up to 10 benefits on a voluntary basis, with some ranging up to around 25 options. Relatively few tend to go beyond this level.

Individual versus off-the-shelf schemes

Employers may negotiate discounts on an individual, ad hoc basis with local (or indeed national) suppliers of goods or services. Alternatively, they may hire a specialist firm to organise the scheme for them (or use a combination of approaches). Where a specialist firm is used, it can either set up an individual scheme on behalf of the employer or alternatively provide an off-the-shelf scheme. Even where organisations use a specialist firm in this way, they may choose to customise the scheme, with a common example being to offer access to their own products or services at discounted rates. Several commercial organisations can set up or operate a VB scheme for employers if this approach is favoured. These types of firms will generally make a charge. According to research from Employee Benefits, 40% of organisations only deal directly with suppliers of goods or services compared with 27% that use a specialist firm to do the legwork for them (with the remainder using a combination of approaches).

Paper-based v online
Another decision for employers is whether to provide a paper-based catalogue or booklet or to arrange online information for employees detailing the benefits available (or both). Paper-based catalogues may be more appropriate in an organisation where many employees do not have Internet/intranet access either at work or at home. For instance, this approach may work well in a large supermarket where many employees are checkout operators without universal access to computing facilities. On the down side, hard copy versions may become out-of-date quickly, although they could be updated and reprinted relatively frequently to help counter this problem. Many employers use both paper-based and online media on a complementary basis to set out details of the offers, as well as the usual methods of employee communications to publicise the existence and value of the VB package in general (see below).

Keeping schemes up to date

Whatever the decision in respect of the presentation of the options covered, innovation is essential to keep VB schemes up to date with changing employee demand and external influences such as tax breaks. The most successful schemes are likely to be those where the benefits on offer are regularly reviewed.


Ensuring accessibility
Employers may need to shop around to try to ensure that services or products on offer are accessible to the whole workforce and avoid any potential scope for discrimination. For instance, in the case of insurers offering medical benefits, are they willing to provide the same service to all employees including older members of the workforce?

Communicating the benefits

Voluntary benefits schemes are sometimes seen as the poor relation within pay and benefits packages, given that employees pay for the cost of the benefits themselves. It is therefore especially important to communicate the advantages of this approach to employees using the methods that are most effective or appropriate for the particular organisation (for example, team briefings, staff noticeboards, email etc). See our factsheet on Employee communication for more information on likely methods.

Go to our factsheet on Employee communication

Pros and cons of VB schemes

Many of the advantages of VB arrangements are similar to those achieved by flex schemes. As with those schemes, the idea is that the benefits are particularly attractive as they are of the employees own choosing. The key advantages of VB include:

For employees, it is possible to gain financial advantage through access to discounted products or services and sometimes through salary sacrifice arrangements. For employers, the provision of an additional employee benefit at low or no cost to the organisation. The employer is also able to use the savings to fund other employee benefits if so desired.

On the other hand, potential drawbacks associated with VB schemes include:

There would seem to be little point to schemes where the benefits on offer can easily be matched, or sometimes even bettered, by a trawl through publicly available high street or Internet offers. Employees may resent having to pay for perks out of their own pockets. For smaller firms, with less negotiating power, it may be hard to capitalise fully on the benefits of VB schemes. There is likely to be a lack of employer control over the individual benefits, for example in terms of the quality of provision. This could lead to negative reactions towards the employer from staff who have problems dealing with say an insurance company or another external provider offering services under the VB scheme.

CIPD viewpoint
The CIPD welcomes the capacity of VB schemes to enhance employee choice and flexibility over benefits packages by offering access to a range of additional perks. VB arrangements can in this way add value to the overall benefits package and hence aid recruitment and retention and improve employee engagement levels. However, the use of VB schemes is only fully effective if tailored to the


needs and circumstances of the firm and its employees, and it is important that there is a clear business case to back the implementation of this type of approach.

References 1. Voluntary benefits and salary sacrifice research 2007 [online]. (2007) Employee Benefits. Available at: pg_dtl_art_news/297/pg_ftr_art
Journal articles

DENNIS, S. (2005) Voluntary benefits: saving in the workplace. No.818. 25 February. pp27-31. Introducing voluntary benefits. (2007) IDS

IRS Employment Review.

HR Studies Update. No 856, October. pp7-16.

This factsheet was written by Janet Egan and updated by CIPD staff.


Studies Find Reward Often No Motivator

Creativity and intrinsic interest diminish if task is done for gain
by Alfie Kohn Special to the Boston Globe [reprinted with permission of the author from the Monday, 19 January 1987, Boston Globe. Also granted translation rights by kind courtesy of the author in 2003. ed.] In the laboratory, rats get Rice Krispies. In the classroom the top students get A's, and in the factory or office the best workers get raises. It's an article of faith for most of us that rewards promote better performance. But a growing body of research suggests that this law is not nearly as ironclad as was once thought. Psychologists have been finding that rewards can lower performance levels, especially when the performance involves creativity. A related series of studies shows that intrinsic interest in a task the sense that something is worth doing for its own sake typically declines when someone is rewarded for doing it.


If a reward money, awards, praise, or winning a contest comes to be seen as the reason one is engaging in an activity, that activity will be viewed as less enjoyable in its own right. With the exception of some behaviorists who doubt the very existence of intrinsic motivation, these conclusions are now widely accepted among psychologists. Taken together, they suggest we may unwittingly be squelching interest and discouraging innovation among workers, students and artists. The recognition that rewards can have counter-productive effects is based on a variety of studies, which have come up with such findings as these: Young children who are rewarded for drawing are less likely to draw on their own that are children who draw just for the fun of it. Teenagers offered rewards for playing word games enjoy the games less and do not do as well as those who play with no rewards. Employees who are praised for meeting a manager's expectations suffer a drop in motivation. Much of the research on creativity and motivation has been performed by Theresa Amabile, associate professor of psychology at Brandeis University. In a paper published early last year on her most recent study, she reported on experiments involving elementary school and college students. Both groups were asked to make silly collages. The young children were also asked to invent stories. The least-creative projects, as rated by several teachers, were done by those students who had contracted for rewards. It may be that commissioned work will, in general, be less creative than work that is done out of pure interest, Amabile said. In 1985, Amabile asked 72 creative writers at Brandeis and at Boston University to write poetry. Some students then were given a list of extrinsic (external) reasons for writing, such as impressing teachers, making money and getting into graduate school, and were asked to think about their own writing with respect to these reasons. Others were given a list of intrinsic reasons: the enjoyment of playing with words, satisfaction from selfexpression, and so forth. A third group was not given any list. All were then asked to do more writing. The results were clear. Students given the extrinsic reasons not only wrote less creatively than the others, as judged by 12 independent poets, but the quality of their work dropped significantly. Rewards, Amabile says, have this destructive effect primarily with creative tasks, including higher-level problem-solving. The more complex the activity, the more it's hurt by extrinsic reward, she said. But other research shows that artists are by no means the only ones affected.


In one study, girls in the fifth and sixth grades tutored younger children much less effectively if they were promised free movie tickets for teaching well. The study, by James Gabarino, now president of Chicago's Erikson Institute for Advanced Studies in Child Development, showed that tutors working for the reward took longer to communicate ideas, got frustrated more easily, and did a poorer job in the end than those who were not rewarded. Such findings call into question the widespread belief that money is an effective and even necessary way to motivate people. They also challenge the behaviorist assumption that any activity is more likely to occur if it is rewarded. Amabile says her research definitely refutes the notion that creativity can be operantly conditioned. But Kenneth McGraw, associate professor of psychology at the University of Mississippi, cautions that this does not mean behaviorism itself has been invalidated. The basic principles of reinforcement and rewards certainly work, but in a restricted context restricted, that is, to tasks that are not especially interesting. Researchers offer several explanations for their surprising findings about rewards and performance. First, rewards encourage people to focus narrowly on a task, to do it as quickly as possible and to take few risks. If they feel that this is something I have to get through to get the prize, they're going to be less creative, Amabile said. Second, people come to see themselves as being controlled by the reward. They feel less autonomous, and this may interfere with performance. To the extent one's experience of being self-determined is limited, said Richard Ryan, associate psychology professor at the University of Rochester, one's creativity will be reduced as well. Finally, extrinsic rewards can erode intrinsic interest. People who see themselves as working for money, approval or competitive success find their tasks less pleasurable, and therefore do not do them as well. The last explanation reflects 15 years of work by Ryan's mentor at the University of Rochester, Edward Deci. In 1971, Deci showed that money may work to buy off one's intrinsic motivation for an activity on a long-term basis. Ten years later, Deci and his colleagues demonstrated that trying to best others has the same effect. Students who competed to solve a puzzle quickly were less likely than those who were not competing to keep working at it once the experiment was over.

Control plays role


There is general agreement, however, that not all rewards have the same effect. Offering a flat fee for participating in an experiment similar to an hourly wage in the workplace usually does not reduce intrinsic motivation. It is only when the rewards are based on performing a given task or doing a good job at it analogous to piece-rate payment and bonuses, respectively that the problem develops. The key, then, lies in how a reward is experienced. If we come to view ourselves as working to get something, we will no longer find that activity worth doing in its own right. There is an old joke that nicely illustrates the principle. An elderly man, harassed by the taunts of neighborhood children, finally devises a scheme. He offered to pay each child a dollar if they would all return Tuesday and yell their insults again. They did so eagerly and received the money, but he told them he could only pay 25 cents on Wednesday. When they returned, insulted him again and collected their quarters, he informed them that Thursday's rate would be just a penny. Forget it, they said and never taunted him again.

Means to an end
In a 1982 study, Stanford psychologist Mark L. Lepper showed that any task, no matter how enjoyable it once seemed, would be devalued if it were presented as a means rather than an end. He told a group of preschoolers they could not engage in one activity they liked until they first took part in another. Although they had enjoyed both activities equally, the children came to dislike the task that was a prerequisite for the other. It should not be surprising that when verbal feedback is experienced as controlling, the effect on motivation can be similar to that of payment. In a study of corporate employees, Ryan found that those who were told, Good, you're doing as you should were significantly less intrinsically motivated than those who received feedback informationally. There's a difference, Ryan says, between saying, I'm giving you this reward because I recognize the value of your work and You're getting this reward because you've lived up to my standards. A different but related set of problems exists in the case of creativity. Artists must make a living, of course, but Amabile emphasizes that the negative impact on creativity of working for rewards can be minimized by playing down the significance of these rewards and trying not to use them in a controlling way. Creative work, the research suggests, cannot be forced, but only allowed to happen.


Alfie Kohn, a Cambridge, MA writer, is the author of No Contest: The Case Against Competition, published by Houghton Mifflin Co., Boston, MA. ISBN 0-395-39387-6. For more information on this topic, see the author's website ( and his book PUNISHED BY REWARDS (rev. ed., Houghton Mifflin, 1999).



Motivation and financial and non-financial rewards

In this article, Derek Stockley discusses the link between motivation and remuneration, including financial and non-financial rewards. Pay for performance I once had an interesting conversation with the owner/manager of a clothing manufacturing company. He operated a large and successful business, principally supplying uniforms for the corporate market. He was surprised by some of his workers. They worked on a piece work rate (paid per item) and some of the very efficient staff did not produce as much as they were capable of. They worked hard at the start of the pay period, but then they tapered off. He expected them to work hard the whole time, as they were paid by what they produced - the harder they worked, the more they were paid. He expected that the extra money reward would motivate them. Motivation is a complex concept. Remuneration is also complex. Individuals react in different ways to pay schemes. A simple explanation for the clothing worker behaviour is that they did not work just for the money. They enjoyed the working environment and the social interaction it provided. They liked to have work, to be employed, and yes they needed a certain level of income. But once they achieved that, the pressure to work hard was reduced. Given that the actual work task was quite monotonous and repetitious, it was not surprising that they exhibited this behaviour. Drastic work design was required. People think that money is a motivator. It does have an effect, but motivation involves far more. Sales people are the classic example. Most are on performance based schemes. But what is one of the main themes sales and marketing consultants write about? You guessed it - how to motivate your sales team! Consultants would not need to write motivation articles if financial reward alone worked. Equity in compensation practices Positive effects come from good financial and non-financial rewards. It is very important to have a well managed remuneration system in place. Fair and reasonable reward is essential and very important for good morale. I believe strongly in the equity theory of motivation. Simply put, the theory states that


people have to believe that their pay is equitable with others. When they compare their salary and benefits with their colleagues and co-workers, they must believe that they are being fairly compensated. If they believe their compensation is not equitable, they become very de-motivated and their work performance suffers. Financial and nonfinancial rewards I subscribe to the theory that states it is the nature of the work that is important. Financial compensation is an element, the importance of which increases when the compensation received is not appropriate. Non-financial rewards can be very important for their longterm effect. Too many employees are "disengaged" from their employment*. It is again time for many organisations and business to look at their human resources and management practices. The figures quoted below are quite disturbing. Summary Management should ensure that their organisations and businesses are using the full range of financial and non-financial rewards available to them. An over-reliance on financial compensation may lead to ongoing problems.

Creating Productive Work Environments

Today's workforce wants more than money the traditional currency. Workers are looking for a "new currency" that can be found in the 5 Rs: Responsibility, Relationships, Respect, Recognition, Rewards. Managers have many options for implementing the 5 Rs in the workplace, and using them for planning, managing and evaluating performance.

Typical job descriptions look like extensive to-do lists ending with a catchall phrase such as "other duties as assigned." The underlying message can be seen as "Do whatever I tell you." Today's workforce is much more interested in flexibility to add value in creating desired


outcomes. Employees want to feel that what they do is important. What can managers do? Make sure jobs are properly profiled for employees and describe outcomes that are relevant to the unit's work. Eliminate tasks and activities that are unessential to your primary mission and talk to employees regularly about ways to increase alignment between what they do and where the unit is headed.

Motivation is an inside job something in each individual that is unleashed under the right circumstances. Effective managers can create these circumstances by building relationships and creating supportive environments. Coaching, teaching, supporting and guiding all are strategies for producing the right outcomes. Above all, managers need to be authentic, honest and ethical. Building trust is essential to helping employees be motivated to take risks and perform to their highest levels.

In a respectful environment, employees are valued and respected for the intellectual capital they contribute. Performance management and review systems are aimed at building confidence and competence. Feelings, ideas and actions are valued and attended to. As a supervisor, you may be part of a larger organization that has its "major league" rules, but how you manage your team is largely up to you. After all, you are the coach. Your expectations will shape the environment. Build on the concept of teamwork respecting differences, solving problems collaboratively, and supporting one another. Avoid negative energy, such as gossiping or harassing. Ifthe larger environment isn't supportive, engage employees in developing operating principles or defining a vision that expresses how everyone will work with one another, how customers are to be served, and how communications are to flow.

For many employees, recognition is not so much about getting credit as it is about being appreciated. Focus on creating intrinsic rewards (genuine


opportunities to contribute, become more knowledgeable and develop professionally) in addition to extrinsic rewards (prizes, incentive contest). Special assignments can be an effective form of recognition, but it can't just be more work. Offer more challenging work or work that utilizes the employee's strengths. It's essential to make sure the assignment is something the employee welcomes. If employees feel taken advantage of, special assignments will generate resentment and frustration rather than positive motivation.

To provide optimum return on investment, rewards must be an integral part of an overall recognition and reward strategy linking business goals and objectives with the other 4 Rs. Effective rewards need to be linked to the individual's goals and preferences. "One size fits all" doesn't work for rewards.

Salary and Compensation Trends for Forward Thinking Organizations

Salary and Worker Compensation Thinking: Shift Underway

Susan M. Heathfield, Guide

See More About:

salary and compensation salary trends variable pay goal setting salary calculators

How to research salary, salary calculators, salary surveys, salary comparisons, basically, all things salary, online, is one of the most frequent requests for information received by the


Society for Human Resource Management (SHRM). This makes sense when you consider the importance of salary to attract talented people, retain key employees, and maintain an excited, motivated workforce. Given the shifts occurring in attitudes and practices about salary and compensation, this is not surprising. Organizations are struggling to keep up with changes in salary and compensation thinking. Gone are the days when organizations gave equivalent increases to all organization members. These salary increases, in the one percent to five percent range, sent the wrong message to underperformers. They left organizations with too small of a budget to adequately reward their top performers. While many companies still use this as their salary criteria, forward thinking organizations are thinking about salary and compensation in a very different way. According to an article on the SHRM website (you must be a member to access), to get the attention of your better performing staff members, you must offer a variable pay rate of seven to eight percent, in addition to their base pay. A system that rewards better performers cannot reward all staff members alike. In addition to sending the wrong message, your pool of money is not unlimited. You must use your compensation as one of your most important communication tools, to send a message about your organizations expectations and goal achievement rewards. Current Compensation Thinking My current thinking about salary and compensation includes the following components.

Organizations need to develop a compensation philosophy and direction in writing that is reviewed by the Board of Directors and agreed to by your managers. Particularly in an entrepreneurial, market-driven company, the compensation philosophy needs to include a method for grouping similar jobs for purposes of broad banding, since promotional opportunities are limited. It should include a responsible, measurement system for awarding variable pay. I recommend less emphasis on increasing base pay, and more emphasis on distributing gains via bonuses that reward actual goal attainment. Goal attainment should be rewarded for both individual and organizational goal achievement to foster teamwork and eliminate the lone ranger mentality. Real goal achievement is attached to outcomes or deliverables that are measurable or offer a shared picture of what success looks like. They should not reward checking items off a to-do list. As the cost of benefits has increased, their place in a total compensation package has increased in importance. Shifting the costs of some benefits to employees is a last-option scenario.

The budget for salary, compensation, and benefits is not unlimited in most organizations. Thus, in addition to traditional increases to base pay, and variable rewards, such as bonuses, profit-sharing and gain-sharing, I recommend attention to quality of work life rewards. These can include the following.

Payment of a one-time, lump sum payment for a result or outcome that deserves recognition.


Payment of smaller rewards with thank you notes for above the call of duty contributions These are not necessarily tied to an achieved result, but they are contributions, that when emphasized, increase the probability of results. Increased emphasis on additional benefits such as pre-paid legal assistance, educational assistance, and vision insurance. Increased opportunity for flexible work arrangements and job-sharing. An organizational emphasis on the training and development of employees. Clear career paths so employees see opportunities within your organization.

In this last category, quality of work life rewards, your imagination is your only limitation. The key is to ensure fairness and consistency for similarly performing and contributing people, whenever possible. I encourage you to do even more for those employees who measurably contribute more to your organizations success. (Of course, this opens up a second philosophical debate fodder for a later article about how and whether your organization provides an equal opportunity for all employees to excel.) In summary, organizations are moving toward salary and compensation systems that emphasize flexibility, goal achievement, and variable pay based on performance, and less emphasis on increases to base pay. They are using bonuses based on profit and accomplishment to add to employee compensation. The rising cost of benefits is causing rethinking of their place in the compensation system. Forward thinking organizations are emphasizing quality of work life rewards and recognition to add to the value of the total compensation package.