Philip Fisher, Employee Benefits Partner at Chantrey Vellacott DFK, explains how to motivate staff and improve performance through incentives and rewards.
Increasingly these days, employers and their advisers are coming up with complex schemes to offer incentives to employees and to minimise the employer’s tax and National Insurance Contributions.
Laudable though this is, often the people who are supposed to be the centre of attention, the employees, are entirely forgotten in efforts to save tax. It is great to minimise tax liabilities wherever possible, but, ultimately, it is better for an employee to get £100 taxed, even at 41%, than £20 untaxed.
This article will considering the best ways of rewarding employees for good performance and loyalty; and encouraging them to offer more of each.
For the vast majority of employees, whether they are company directors earning £1 million a year or staff in McDonald’s on the National Minimum Wage, the best type of incentive is cash, or a direct payment into their bank account.
Depending on what the employer is trying to achieve, this can be paid as extra salary or a bonus – either immediate or deferred.
Number two in popularity is something else that consultants have a nasty habit of forgetting – time. Very few of us have enough, and the opportunity to take time off through flexible working arrangements or additional holiday entitlement can prove extremely effective and rewarding.
Neither of the options give so far are particularly tax efficient, but the next suggestion, an employee share incentive scheme can be very much so. Many of the restrictions on share schemes have been lifted in recent years, and for smaller companies, Enterprise Management Incentives offer real rewards at low cost. Even for companies that do not qualify, there are schemes that can be efficient; and allow the irresistible possibility to align employees goals with those of the company.
Flexible benefits schemes offering a shopping list of benefits can also offer major rewards and they will be considered in a separate article.
Company cars used to be the ultimate reward but thanks to major hikes in tax rates, are rarely efficient – although for some employees the chance to drive a flashy Jag is worth paying for. The key here is to consider the best way to offer both the car and fuel to the employee. Often, the most tax-efficient route is a company loan plus a tax-free allowance for mileage covered.
The rules on loans have not moved in recent years but companies can offer loans of up to £5,000 without any tax implications. Even on larger loans, the tax charge based on a beneficial interest rate of 5% can seem attractive.
Electronic goodies have also proved popular, although changes in the 2006 Budget might mean that computers and Blackberries will fall out of favour. Mobile phones should still be attractive, although employees can only have one each without incurring a tax charge.
In some industries, it is common or even necessary to provide accommodation for employees. These will incur tax charges, but the use of a luxury flat (or yacht), either near to where one works or in a holiday resort might well be worth the money.
Sometimes the best incentive that an employer can offer is to enter into a PAYE Settlement Agreement. These are contracts with HM Revenue and Customs that allow the employer to settle employees’ tax liabilities. If you have given your top saleswoman a holiday in the United States she is unlikely to be chuffed when she gets landed with a tax bill a year later.
In summary, there are plenty of options – not al of tem obvious. Which to choose and why, will form the subject of forthcoming features
Health is now a big issue and benefits can vary from traditional insurance policies through health screenings and gym membership to the provision of a chiropodist or now that the NHS is receding from that profession, a dentist.
As a final word, often the best incentive is the one that nobody else is offering, say a free season ticket. If you want to keep your employees happy, find out what makes them tick and this will almost certainly prove to be a major incentive for them. Whether it is a ticket for the next Arsenal home game, a day at a spa, a 42” plasma TV or the latest Killers CD you could well make a friend for life – and it might not even cost that much.
