A European perspective

It will be interesting to see how history views 2008. Will the events in the financial world mean that 2008 will be on record as a turning point and we will always talk about everything in terms of pre- or post-2008? It remains to be seen.

However, in the shorter term we can say that the environment in which organizations are operating is more difficult today than it was at this time last year. In addition, there are much greater financial challenges facing many individuals, be it either as a result of a fall in the value of their savings and homes or their difficulty in obtaining credit. On the other hand, those in secure employment are enjoying the benefit of lower interest rates on their borrowings. Secure employment is, of course, not as common as it was 12 months ago, when a career in a leading bank was considered to be as secure as you could get. The business environment has changed, and the nature of employment relationships has changed with it.

In these circumstances, we have to consider how any employer can afford to provide rewards that either do not achieve a strategic objective for the employer (such as improving required skills and competencies or increasing sales) or do not meet a need or desire of employees (such as family health care, more retirement savings or greater workplace flexibility). This leads us to the conclusion that employers must review their spending on employee rewards and consider whether a greater return could be achieved by allocating that amount differently. Given that employees have different preferences and needs, we are led to the conclusion that employers should provide flexibility, or flexible benefits, for employees.

Of course, it could be argued that the reasons for introducing flexibility have always been there, so why should organizations that did not adopt such an approach in the past do so now? Flexible benefits should be considered by employers now as in these unprecedented times:

• Employers cannot afford to be providing benefits that employees do not value. Given that employees have different needs and values, fixed benefits cannot possibly meet all their needs

• Given the limited scope for salary increases and bonus payments, providing flexibility around benefits and other non-compensation elements of rewards can increase the perceived value of the employment package for employees, with relatively little additional cost to the employer.

• The circumstances and attitudes of many employees have changed. We describe these further below.

Many employees find themselves going into 2009 in a very different situation to the one in which they entered 2008. The reasons for this include:

• The famous Generation Y employees (those born after 1985) are, for the first time in their working lives, experiencing a downturn. Suddenly, managing their own careers as they frequently change employment or take career breaks has become more difficult. Saving for a rainy day instead of spending all their money today no longer seems so boring. For many, the value of the apartment or house they purchased with a 100 percent mortgage has dropped and left them with negative equity. Life is not as much fun as it was before.

• For many Baby Boomers (those born before 1960), the concept of early retirement has dropped off the horizon. Be they in a defined benefit or defined contribution retirement plan, the potential for them to retire early on an adequate income has suddenly significantly decreased. Many have followed the collective wisdom and invested their long-term savings in equities, as they have always produced the best long-term returns. Or at least they used to! Others invested in second properties or holiday homes, only to discover that they did so at the top end of the market.

• On the other hand, Generation X (those born between 1960 and 1985) may be doing quite well. Retirement is far enough away that they can wait for their retirement and other savings to recover again (hopefully!). Their biggest item of expenditure was their mortgage and repayments have significantly fallen with decreasing interest rates. Their mortgages are likely the sensible 20- or 25-year mortgages with decreasing capital – not the 30-year-term, interest-only deals offered to new borrowers over recent years.

Employees in these generations have, in general, been impacted very differently by the events of 2008. However, what they do have in common is that their circumstances and perceptions have significantly changed. In addition, the security of their current employment is unlikely to be as high as it was 12 months ago and their potential for making career moves to other employers has decreased. All are considering how they should manage their lives in these changed circumstances.

• Employees may wish to save more than they did in the past as a result of the lower value of their existing savings or their increased potential to save due to their reduced mortgage commitments. Generation Y employees may have woken up to the fact that they are not immortal and may similarly wish to adopt a different approach.

• On the other hand, employees who are not receiving salary increases or lower bonuses may wish to reduce their holiday or health-care benefits to provide extra cash to meet their daily needs.

• All generations are also more aware of the risks of being dependent on oil-related means of transport. In many countries, there is favorable tax treatment for employers that, through a flex plan, facilitate the purchase by employees of either a bicycle or a ticket for public transport. The level of employee appreciation for such options has increased significantly.

• With rising unemployment, there may well be a move back to more informal or family-centric child care arrangements, with a resultant decrease in the number of employees putting their children in crèches. Formal child-care voucher plans, popular in some countries, may not continue to be the preferred choice of some employees.

• In the past both spouses may have been employed, with all the associated life insurance, disability and health-care coverage; but if one spouse is no longer employed, the working spouse may need to make changes to his or her benefit levels.

• With falling consumer demand, the opportunity for employees to use their group buying power to secure better deals from suppliers has increased significantly. Flex plans can allow employees to use their group-buying muscle to achieve better value for all types of common purchases, from insurance to wine, from bicycles to theater tickets.

Of course, there is a cost to introducing flex, as it requires an administrative effort. Constantly improving technology means that this is not nearly as much of an issue as it was, say, five years ago. Although there is a cost, it is relatively small in comparison to the extra value delivered to employees during these difficult times. So, therefore, we pose the question, “Can you afford not to introduce flex?”