- 1 EXECUTIVE SUMMARY
- 2 LIST OF FIGURES
- 3 LIST OF TABLES
- 4 1 Introduction
- 5 2 Literature review
- 6 3 The economic crisis and the transition in methods of motivation: The need for an innovate benefits package
In recent years, in the UK, both employees and employers have to bear negative impacts from the recession, especially employees with their financial difficulties and diverse needs. It is more important than ever for motivation. However, employee motivation is getting harder and harder in the face of economic crisis. In times of gloomy pay awards, employers are finding ways motivate their workers through benefits. Benefits than can address the financial concerns and the diverse needs of employees would work effectively as motivational factors. The traditional benefits package is likely to be ineffective during recession, so employers are seeking for an alternative approach to benefits provision. The flexible benefits schemes are getting more popularity since many evidences has proven its positive effects in motivation. However, it is not always easy to construct truly effective flexible benefits schemes. It is necessary to have a careful consideration for the structure, communication, implementation, administration, the benefits of the schemes and some current issues that can influence the adoption of this approach.
Figure 1: The process of strategic reward management 8
Figure 2: Food inflation. 10
Figure 3: Earnings growth and inflation (%) 11
Figure 4: Maslow’s hierarchy of needs. 14
Figure 5: Common structures of flexible benefits schemes. 20
Table 1: BENEFITS STRATEGIES IN PLACE DURING TIME OF LOW PAY AWARDS. 18
Motivation is a range of processes that directs an individual towards a goal continuously. Motivated employees can work harder, have higher productivity and greater work performance, possess more profound organisational relationships, stay with the oganisation longer and are less likely to leave. That is because motivation is one of the three factors that affects employees’ performance according to Moorhead and Griffin (1998) and it is indicated in the following formula:
Performance = Motivation + Ability + Environment
Of all the above factors, it is generally accepted that motivation is the most difficult one to manage. This is mainly due to the complexity of human nature while the other two factors can be adjusted accordingly to suit the needed performance. As a result, the most challenging job for every employer is to motivate employees to work at their best for the organization.
Nowadays, what employees seek from their organisations no longer restricts to just financial rewards. Furthermore, the tense competition between companies in talent attraction and retention has given employees the power to demand more than just a sensible pay, and there are evidences that companies are paying attentions to this matter. According to a recent survey cited by Sadri and Bowen (2011), salary had only a 20% impact on job satisfaction. To motivate employees, companies are now finding ways to satisfy their needs on both extrinsic (financial) level through monetary compensation, as well as intrinsic (psychological) level through accompanied benefits. The constant attempt is to be innovative in constructing a benefits package that can draw in and keep talented workers.
In recent years, employee motivation in the UK is getting harder and harder in the face of economic crisis. Employee needs become more sophisticated and difficult to be fulfilled under economic pressure. Meanwhile, companies’ spending on human investment needs controlling closely, which leads to the doom and groom surrounding monetary compensation. This gives pace for employee benefits to rise in popularity as a promising option of motivation. According to Employee Benefits Research 2012, there has been a consistent rise in the percentage of employers that offer benefits through other mechanism than traditional benefits (flexible benefits, voluntary benefits or salary sacrifice arrangement). This information suggests that employers doubt the effectiveness of the traditional benefits schemes in motivating their employees in times of uncertainty and they are looking for alternative schemes that might have better effects.
The paper aims to discover the alternative benefits schemes that can better motivate UK employees during gloomy economic climate. To achieve this purpose, the paper is going to:
- Investigate the impacts of the UK economic crisis on both employees and employers to find out the trends in UK employee motivation.
- Assess the effectiveness of the traditional benefits package in motivation of British today workforce and economic environment in order to explain employers’ shifts to a more flexible approach to benefits provision.
- Suggest the potential approach and evaluate its motivating effectiveness in the same context as the traditional package.
Many effortshave been made to understand how motivation works and the factors that determine its strengths. Frederick Taylor (1911) believes that employees are motivated by the economic interests only. This view was criticized powerfully later as researchers found out that human behavior is much more complicated than what Taylor had assumed. Other thinkers soon realized the importance of employees’ role in organisations and form a new approach to motivation called Human Relations Approach (Middleton, 2002). This approach suggests that employees’ job satisfaction is closely connected with work performance and it is fueled by many other needs than financial desires. The theories developed from the approach can be classified into two types: Need-based and Process-based ones. Need-based theories explain how employees are motivated by satisfying their needs. Important theories include Maslow’s hierarchy of needs (1943), Alderfer’s ERG theory (1969), Herzberg’s Two Factor Theory (1959), and McClelland’s Achievement Need Theory (1961). On the other hand, process-based theories concerns with “how” motivation occurs and consists of three famous works: Expectancy Theory (Vroom, 1964), Goal Theory (Locke and Latham, 1990), and Equity Theory (1963). These theories also help to categorise types of motivation practices, which are monetary incentives, job design, rewards, and quality-of-work-life (Kreitner, 1986).
Many studies have proven that rewards are an effective way to motivate employees. Reward strategy is used widely and plays an important role in organisations nowadays. Employee benefits are also a form of rewards in the company’s reward package in addition to various forms of cash pay such as pensions, paid holidays and company cars. According to Armstrong and Murlis (2004), employee benefits are provided for the personal needs of employees to increase their commitment to the organization and demonstrate employers’ care for them. They generally form a significant part of the remuneration package, with estimates suggesting that their value can account for up to around 40% of the costs of employing staffs. Any approach to employee benefits must be considered in the context of the overall reward and business strategy of the organization (the integrated approach).
Source: Adaption from Armstrong and Murlis (2004) cited by Chartered Institute of Personel and Development (2000)
In the UK, in mid 1800s, employee benefits provision was offered for the first time due to a common belief of employers’ moral duty to look after their employees. At the turn of the 20th century, with the arrival of national welfares to the general population, organisations built benefits provision based on state benefits such as complementary pension or health arrangement. From then on, the implementation of incomes policy and taxation regime has driven the design and content of employee benefits to become more generous. Currently, the major types of benefits on offer among employers include paid holidays and time off work, pensions, healthcare and risk benefits,company cars and car allowances. Choices of benefits provision has been changing over the years as reported in Employee Benefits Research 2012, offering benefits through another mechanism than the traditional core package, be it via flexible benefits, on a voluntary basis or through sacrifice arrangement.
Flexible benefits – the focus of the paper – provide employees “a choice within limit of type or scale of benefits offered to them by their employers” with a wide variety of approaches to satisfy their personal requirements. It is important to clearly distinguish this arrangement with voluntary benefits(Armstrong and Murlis, 2004). Flexible benefits gained their roots in the USA around thirty years ago and they soon become popular across the western world. Flexible benefits are usually offered through a formalized plan in which employees are able either to retain their existing salary while varying the mix or levels of various benefits they receive, or to adjust their salary up or down by taking fewer or more benefits respectively. However, in reality, they can appear in other forms in a benefits package, for example, on a voluntary basis or through salary sacrifice arrangement. In most schemes, it is typical to set out a list of core benefits  and have a menu of non-core ones for employees to given consideration to. The flexible approach sparks interests due to the assumption that not all employee benefits are equally wanted or appreciated by the staffs. Flexible benefits are very popular and well-developed in the US, but their growth in the UK has been very limited despite all the discussion and attention generating over the years, particularly because of the efforts and costs of introducing and administering them. In this paper, whatever the forms in which flexible benefits appear, they are all considered as flexible benefits schemes.
3 The economic crisis and the transition in methods of motivation: The need for an innovate benefits package
The British economic recession officially began in the spring of 2008, triggered by the US financial crisis in 2007, recovered somewhatduring 2010 and 2011, and showed signs of return at the beginning of 2012. The crisis obviously has very bad impacts on both employees and employers.
In terms of employees, the crisis kicks in their everyday lives first. Their living standard is worsening because of increasing price, declining pay and rising debts. Employees, as consumers of the economy, have to face rising living costs caused by high inflation. The prices of commodity have been going up rapidly, pushing up the basic living costs such as gas, food, and house rent. For example, food inflation in the UK is currently standing at 6.3%, three times higher than the average 2.1% of the world’s seven biggest economies, according to figure from OECD (Figure 2).
Meanwhile, British incomes have been shrinking heavily on the onset of recession. As said by Office for National Statistics, national income per head of the UK in the four years of 2008-2012 dropped by 13%, much more sharply than it did after the recession which came in the wake of Winter of Discontent and the 1979 oil shock (BBC News, 2012). Moreover, the high inflationcontinues eating into what people are earning. Figures from XpertHR shows that the pay rise in 2012 is only 2.5%, barely keeping track with the inflation rate of 3.7% (Attwood, 2012). The below graph indicates more clearlyhowthe inflation outstripsthe growth in people’s earnings:
Source: This is the Money (2011)
Debt is also becomingan increasing problem that almost British employees have to confront, especially the ones who have family. As analysed above, people have to spend morethan what they earn. The fact that their sources of incomes decrease causes them to take debts to sustain their everyday lives. As a result, debts build up constantly and people have to struggle to manage them. According to a research from Money Advice Trust, around 10 million people in the UK, about 20% of adults, are in such situation(Culpan, 2012).
All these above issues put almost all British employees into financial difficulties. Many reports and surveys have recorded such a picture. For instance, the Chartered Institute of Personnel and Developments (CIPD)’s survey reportSummer 2012 Employee Outlook focusfound out 59% of UK employees reporting some financial struggles.
Financial concerns canhave serious impacts on employees both at home and at work. At home, employees are under the pressure on their worsening living standard as noted before. At work, financial worries are a profound source of stress for many. As indicated by one study, among the five key stressors in life (relationships, work, health, crime/violence,and personal finance), personal finance is rated as thenumber one source of stress; concerns about personalfinance are five times higherthan those regarding health (Cash, 1996 cited by The Shepell FGI Research Group (2009).Research from Axa in 2010 discovers that a high proportion of UK employees suffers from physical and mental stress over financial worries (Barton, 2010). The research also points out that poor financial wellness is one of the most common causes of workplace absence and declining job productivity.
Another remarkable source of stress for employees is job insecurity. The highest rate of unemployment over the decade and massive redundancies during crisis cause anxiety and suspicion over job position. For the majority, it is case of having watched colleagues leave while those left have to pick up the pieces to carry one, often still feeling jittery about their own jobs. Around one fifth of UK employees feel that they could lose their jobs because of the economic downturn, reported by CIPD in the Autumn 2012 Employee Outlook Focus.People who are still in employment do everything they can to hold on to a regular pay cheque under severe pressures.
Financial worries and job insecurity have boosted workers’ stress to an unprecedented level. Work stress levels during recent economic downturns rose by more than 4%, compared to annual rises between 0.1% and 1% from 1992 to 2009 (Moskvitch, 2010). Increasing stress has led to decreasing employee productivity and low morale in most organisations in the UK.
Regarding to employers, the most noticeable effects of the gloom economic climate are all related to finance in some ways as well. As it gets more and more difficult to gain access to financial sources, most organisationsrestructure their business and control costs under rising scrutiny. Generally, the workforce whose salaries/wages and rewards usually take up a big proportion in business operating expenses is the first target to reorganize in order to cut costs. During the period of 2008-2009, massive redundancies and job cuts were carried out across all sectors of the UK economy, and the number in 2008 alone already reached 154,266 (The Telegraph, 2008). The pay is also in gloom: small increase, freeze or reduction. With the downsizing workforce, employers have to increase the workloads for employees.These actions impacts negatively on the workers as mentioned above. Consequently,employers face lower employee productivity and performance arising from stress and anxiety. Stress is estimated cost the economy £3.7 billion a year in lost productivity.
The analysis in the previous part has proven that it is more important than ever for employers to motivate their employees. Ina research by Grass Foots, 61% of employers agree or strongly agree that, in times of economic uncertainty, there is a greater need for motivation with incentives (Washington, 2009). However, how employers should conduct motivation when both parties are in race to straighten their finance is a challenging question.
It is difficult for employers to use pay and monetary bonuses in its remuneration package for motivation in such a gloom economy. A rise in pay and bonuses, however small it is, can be extremely costly when being implemented. A good example for this is the case of how increased bonus backfire Gordon Brown in 1999 when, as Chancellor, he awarded pensioners an increase of 75p per week. In fact, Mark Childs, managing director of theTotal Reward Group, recommends using apay rise altogether if it is only around 1%(Barret, 2012). The doom and gloom picture surrounding monetary compensation has given pace for benefits to grow in popularity as a promising option of motivation. Traditionally, benefits have been already seen as an effective retention and recruitment tool in the eyes of UK employers. According to Employee Benefits Research 2012, these two are the top reasons why employers offer benefits, 80% for retention and 79% for recruitment. Furthermore, there is a number of positive news about how the economic crisis changes employees’ attitudes towards benefits.The Guardian’s study in 2009 found that a high proportion of employees are afraid of taking time off from work to preserve benefits, and more than half of them even agree a salary deduction or no raise in bonus to maintain the current level of benefits. The increasing awareness by employees of their financial vulnerability seems to have translated into greater appreciation of the value of benefits in the reward package.
As Armstrong (2010) said, employee benefits are developed on the basis of the needs of employeesin order to become motivational factors.Therefore, to motivate employees during crisis, the benefits must be able to satisfy the unfulfilled needs of employees. Recently in the UK, employee needsbecome more sophisticated and difficult to be fulfilled under economic pressures.The hierarchy of needs developed by Abraham Maslow(1943) can help to explain the changes in employee needs during economic downturn. There arefive basic needs that underline all human activities. Those needs, presented in a hierarchical order from the most basic to the most advanced, are physiological, safety, love/belonging, esteem and self-actualisation(Figure 4).
Source: Maslow (1943)
For a person to be motivated, each need has to be satisfied significantly in order for an individual to move up to the next level. However, in times of economic uncertainty, the two most basic needs of employees, which are physiological and safety, are in lack of fulfillment. The previous part of the paper has given a clear picture for this statement. Fundamentally, these two needs are not fulfilled due to the financial difficulties employees are experiencing. These worries are likely to lead to problems related to employees’ wellbeing such as health, mental pressures, etc. Benefits that can practically reduce employees’ financial stress or contribute to improving their wellbeing will be effective motivational factors as they can fulfill the needs that are missing.This is also one of top concerns in the minds of HR professionals during economic crisis.
Meanwhile, the difference of human needs between individual and individual are generally accepted in theory of motivation. Therefore, each employee must be treated as an individual with his/her own unique needs. This fact is especially true since today’s workforcein the western world in general and in the UK in particular is getting different, compared to the past and within the working population itself. Podro (2011) has outlined three significant pointers to changes in the composition of British workforce. The working population will be older than it is now and it will also be more femenished and more ethinically and culturally diverse (for a full description of the changes, see Appendix A).Taken all these changes together, it is essential to pay attention to the needs of each individual when providing benefits.
To sum up, motivation is extremely necessary in the face of crisis, but how to conduct motivation effectively under the economic pressures is a challenging task. Employers are now looking at other ways of motivating staffs beside monetary compensations due to the doom picture surrounding them. Employees benefits are rising in popularity as an alternative option. A good benefits package can be much less costly than an increase in pay and bonus, and employees are currently showing greater attention and appreciation of the valued of their workplace benefits. Benefits that can reduce employees’ financial difficulties and attach special importance on the wide variety of individual needs in the workforce would work as effective motivational factors during bad economic climate.
Benefits in a traditional reward packageare fully paid by employers and pre-defined. The package usually includes vacations, sick leave, company car, holidays, contribution to life, health insurance, and pension cover. This benefits package has been practiced in corporates for several decades. It has been seen as viable and effective in motivation for many years. It is questionable if the view is still true.
In the past, the dominant part of the working population was the stereotypical Caucasian male class. Their needs and demands were the basis for formulating reward strategy, to which benefits belong. However, as mentioned above, the working population in the UK has become significantly different with a more complex composition. It is logical to recognize that different categories of the workforce have distinctive needs and expectations.Added to this, most theories of motivation emphasize that providing employees with rewards that they want and desire is associated with greater motivation.This fact can be highlighted more clearly through some very simple examples. Young people would be more interested in such thing as holidays and company cars while mature employees would concern with their retirement plan, presented by pension benefits. A working mother would greatly value flexible working hours and assistance with childcare.
The fixed sets of benefits in the traditional package cannot address the unique needs of each group of employees. The package cannot ensure employees feel valued and fairly rewarded to put more efforts for better work performance. Thus, motivation is not achieved. Taken together, it can be concluded that employers will have to find a new approach to benefits provision in place of the traditional package. Commonly, they may consist of occupational sick pay, private medical insurance, life insurance, permanent health insurance, critical illness insurance, employee assistant plans, and dental insurance. The traditional package of employer-paid pre-defined benefits in which employeescan now opt out of, or switchbetween, perks. A package of employer-paid benefitsthat enable staff to switch betweentwo or more benefits, or betweenemployer-paid perks or cash. The mechanism through whichemployees can opt to pay fortax-efficient benefits by sacrificingsome of theirgross salary for theemployer to purchase these benefitson their behalf. Products or services on which theemployer negotiates a discount withsuppliers, but which the employeepays for out of his or her net salary. The benefits that employers provide all employees.