In the wake of the Covid-19 pandemic, employees’ priorities have shifted away from purely financial motivations. But if cash is no longer as important as it once was, how can employers best retain and incentivise workers in this new era? In light of what many have termed the ‘Great Resignation’, how should employers counter employee poaching? Will post-termination restrictions be accepted by the next generation of employees and what will be the challenges to their enforcement? This blog post summarises some of the key themes discussed at a panel session on employee benefits from last week’s European Employment Summit.
Pay is no longer the only thing that drives recruitment, performance and retention. As a result, employers are becoming more and more creative with their employee benefit propositions. A trend we are seeing is an increase in flexibility in benefit offerings. In recognition that one size does not fit all, organisations are not only allowing employees to work flexibly by offering hybrid and remote working arrangements (see our previous blog post on the considerations for employers when it comes to hybrid and remote working), but they are also allowing employees to opt in and out of benefits to suits their lifestyles and needs. For example, some organisations are offering cash amounts to employees for use on whatever is most valuable to them, whether that is a gym membership or childcare. Others are allowing employees to flex their bank holidays to use at other periods throughout the year. One of the key drivers for this is a desire to improve employee well-being. In addition to the flexibility we have already mentioned, well-being can be targeted in a number of ways. In particular, offering additional time off through well-being days or company-wide holiday days has increased in popularity amongst global employers.
Of course, the roll-out of these ‘non-traditional’ benefit arrangements is not without its challenges. There are a variety of legal, regulatory, tax and immigration issues that organisations must grapple with. In addition, as some businesses move towards a ‘work from anywhere’ model, there is a drive from employees for consistency of benefit arrangements across the globe. This in itself causes practical difficulties from an implementation perspective, as global employers are forced to contend with a myriad of local laws and market trends.
What does all of this mean for ‘old fashioned’ employee cash and share incentive arrangements? They still have an important role to play in incentivising and retaining the workforce. However, the more traditional incentive arrangements are also being adapted to reflect the new world of work and investor expectations. In particular, the number of companies incorporating ESG metrics into their variable remuneration arrangements has increased rapidly in recent years as ESG issues have soared up the boardroom agenda. For many employers, taking ESG issues into account when it comes to incentive arrangements is not straightforward. There is a variety of guidance for companies to consider, but no consistent framework or detail (see our previous blog post for more detail on these challenges).
Benefits for the entire workforce
Consideration of ESG metrics isn’t the only way in which traditional incentive arrangements are changing. Over recent years, we have started to see much more alignment of benefit offerings between senior managers and the general employee population. Initially kicked off by investor pressure on listed UK companies to equalise pension contribution rates between executives and the wider workforce, some businesses are now implementing more generous all-employee share plans with the aim of trickling down value to employees at all levels of the organisation.
Now that we live in a world where there are many different types of working arrangements aside from the traditional employment model, how do employers incentivise non-employees, such as self-employed contractors or workers? As our previous blog post on employers of record explains, there are often legal and regulatory obstacles to overcome when broadening participation in incentive arrangements beyond the employee population. There are also practical issues to consider. For example, many traditional share plans are based on a three-year vesting period, which is unlikely to work for individuals who take a much more short-term or ad hoc approach to their engagements. However, as legislators and regulators become more accommodating of alternative ways of working, we may start to see participation in incentive arrangements expand.
Linked to employee benefits is the world of post-termination restrictive covenants. Post-termination restrictions are as common as ever, but enforcement of those restrictions is on the rise. A trend is also emerging of companies linking compliance with restrictive covenants to their wider incentive arrangements. This has been common in the US for some time now, but many UK companies are now looking to introduce forfeiture provisions if a non-compete is breached. In addition, the structure of restrictive covenants is becoming more complex. Many employees will now be subject to separate covenants in their employment contract and incentive scheme rules as well as non-competes with a parent company in the corporate group. These trends are of course company- and sector-specific.
Employee benefits are likely to look very different in five years’ time than they do now, and in order to stay competitive, employers must do more than just adapt – they must anticipate. Watch this space for future blog posts on the European Employment Summit, and on employee benefits more generally.