Presented to the Institute of Actuaries Students' Society

on 28th January 1972

FRINGE BENEFITS FOR EMPLOYEES

by

D. F. Spargo

INTRODUCTION

The total remuneration which most employees receive from their employersconsists of two distinct components : -

i) direct elements such as basic salary, incentivebonuses, overtime and similar items all of whichare immediately reflected in regular pay; and

indirect elements such as contributions to statutory andprivate benefit schemes and other emoluments,directly related to or associated with the job whichare usually paid in kind but which have a definitevalue to the recipient, none of which is so reflected.

It is not the purpose of this paper to discuss the first component but toconcentrate on certain items in the second.

Although it is difficult to obtain precise figures, there is considerableevidence to suggest that, on average, companies in the United Kingdomspend between 20% and 25% of payroll on indirect elements. It isinteresting to compare the position in the United Kingdom with that incertain of the common market countries. From a study of the subjectrecently undertaken by a firm of consultants, two general conclusions canbe drawn : -

(i) continental countries spend more on indirectelements than we do;

throughout all countries, there is a markeddifference in the amount spent for employees atdifferent levels in the company.

The following figures are based on that study and they show the estimatedtotal average amounts spent in certain countries expressed as a percentageof the corresponding payroll : -

Country White Collar Blue Collar

Belgium 34 28

France 37 28

Italy 39 32

United Kingdom 24 19

These figures include expenditure on two types of benefit which have oftenbeen discussed in the past and which are not included in this paper. Theseare Social Security benefits and private schemes providing benefits payableto employees and thei r dependants on death or retirement. The paper willconcentrate on the remaining part of the indirect component, which I shallcall "fringe benefits". (Before leaving the comparative figures quotedabove, it is worth remarking that the differences in the figures are partly

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explained by the different levels of benefits in the various countries.However, with membership of the Common Market a virtual certainty, itseems that any move to harmonise working conditions can only lead toan increase in this country of Social Security benefits or private schemebenefits or fringe benefits - or perhaps all three).

Why are these fringe benefits provided at all and why is direct remunerationnot the only way of paying an employee for the work he does ? A numberof explanations have been advanced which include the following : -

in times of high taxation, fringe benefits offera means of increasing the rewards without atthe same time attracting penal rates of taxation;

for paternalistic reasons;

fringe benefits help to attract new staff but,more particularly, motivate them and encouragethem to greater efforts.

From the company's point of view, there is no tax advantage in spendingmoney on fringe benefits rather than increasing direct remuneration.Why then, choose the fringe benefit route ? I think, and it is purely apersonal view, that the reasons include : -

competition which has forced companies to providegenerous fringe benefit programmes and to continueto improve them;

to preserve the company's image;

paternalism, although undoubtedly one of the earlyfactors (which persists today in attitudes to blue collarworkers) has now been replaced by other considerations,especially tax avoidance, which are, of far moreimportance particularly for higher paid employees.

It is interesting to note that the scale and extent of the fringe benefitsprovided are directly correlated with status. There is no doubt that bluecollar workers, in general, are worst off and enjoy very few of the benefitswhich are dealt with in this paper. Most of them are designed forand available only to white collar workers and management. The higherthe level of responsibility, the greater the variety and value of the fringebenefits available. This is inevitable in times of high taxation where itis only to be expected that, at higher salary levels, there is diversionof "extra pay" into the less highly taxed area of fringe benefits.

Whatever the reasons and whether or not my estimates are accurate, onething seems clear. Companies do spend a great deal on fringe benefitsbut most employees have not the slightest idea of how much is spent ontheir behalf. Market & Opinion Research International recently carried out

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a survey on fringe benefits. The results were summarised in theOctober issue of "The Director". Among a number of interesting factsto emerge, it appears that respondents to the survey thought that theircompany spent only 5% - this was the median answer - and as many as17% just did not have any idea at all.

It is against this background that I shall be reviewing the range of fringebenefits provided in this country. This is not intended to be a study ofthe fringe benefit area in depth. The purpose of the paper is to review thevarious types of benefit provided and to comment in very general terms ontheir purpose and value.

SHARE INCENTIVE SCHEMES

This is a fascinating field and one where I cannot resist the temptation todiscourse a little. Undoubtedly, high taxation rates since 1945 have beenprimarily responsible for the development of these schemes. They aredesigned for executives and senior management, and as far as I know,have not been introduced at lower levels. A brief history is as follows : -

(i) In 1945, interest centered on share option schemes -the right to purchase shares in the company atpre-determined prices in future - which were (andstill are) commonly found in North America. In thiscountry these schemes were largely defeated becausethe Inland Revenue insisted that options should betaxed on their value when exercised. Any profit was,therefore, taxed at the full marginal rate of incomeand surtax.

(ii) In 1960, in an important case (Abbott vs Philbin), theHouse of Lords ruled that the options should be taxedwhen granted - a very different approach, whichopened up option schemes at modest charges with anyprofit entirely free of tax. (The introduction of a longterm capital gains tax in the 1965 Budget meant a taxof 30% of the profit but this was still very much belowthe marginal rates of income and surtax).

(iii) The position was dramatically changed by the 1966Budget which reversed the 1960 decision and put shareoptions back to the basis of being taxed when exercised.This effectively killed share option schemes and led tothe development of a new idea - the share incentivescheme.

Several incentive schemes have since been developed and tried including : -

schemes which depend on the conversion of notes orsimilar "paper" into shares as opposed to the right topurchase shares in future on favourable terms;

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loans to executives, through the medium of a trust, topurchase shares (which involve company finance andcan lead to difficulties over the rate of interest to becharged).

partly-paid share plans.

The first two types have not proved popular, and I will confine myself tothe partly-paid share scheme which has become very popular over the lasttwo or three years. The principles on which the typical scheme works canbe summarised as follows : -

shares in the company are offered to eligible executivesat a fraction of the offer price, which is usually theaverage market price of the shares over several weekspreceding the offer; 5% is a popular fraction butlower figures are not unknown and at least one schemeis based on ]%;

an incentive period is fixed, commonly 5 years, at theend of which the executive has the right to pay the balanceof the offer price and become the absolute owner of theshares;

until the expiry of the incentive period and the paymentof the balance of the offer price, the shares carry onlyproportionate voting and dividend rights and are nottransferable except with the prior consent of the Board ofDirectors;

any profit on the subsequent sale of the shares (this willbe the difference between the value on realization andthe offer price) is subject to capital gains tax at 30%which is considerably less than the executive's marginalrate.

The schemes offer several advantages to both the company and theexecutive over "conversion" and "loan" schemes. Here are some of them

the cost to the company is nil and very small to theexecutive;

there is no need for loans and no question about whatrate of interest to charge;

protection against financial loss can be incorporated byadjusting the final payment, though the sum of theinitial and final payments must be at least equal to thenominal value of the share;

as far as can be judged from recent experience, theInland Revenue will probably approve any scheme setup on what can now be described as "standard lines".

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The Inland Revenue have some complicated rules to determine whetherthe exe cutive is in receipt of a benefit at the offer date. (If he is deemedto be in receipt, then the full amount is taxable at once at the marginalrate of income and surtax). These rules apparently involve discounting thefixed sum payable and comparing this figure with the value of the share, inits partly-paid form, at the offer date. In a recent case, where thesubscription rate was 21/2% and the incentive period 3 years, the Revenuedecided that there was no benefit. Admittedly the offer price was basedon the full market price on the last dealing day (and not on an average oversome weeks) but I do not think this was a material factor. I interpret thedecision as giving the "green light" to this type of scheme provided it iscorrectly set up. It is very important, however, to submit each case tothe Revenue before implementation and obtain a ruling.

It is also worth stating that, since the first of this type of scheme wasinstalled, a number of generally accepted rules have emerged : -

the scheme must be approved by shareholders, whichusually involves a published circular and approval at ashareholders' meeting;

the scheme should not increase the equity by more than5% over ten years (and schemes from the large companiestend to set a lower limit of 21/2% or 3%);

the creation of a new class of share should be avoided;

the terms of the scheme should be designed to avoidany distinction of shareholders' equity.

The scheme depends on the not unreasonable assumption that, in the longrun, the company's share price will rise. Its real attraction, to theexecutive, then comes from the gearing built into the scheme. With asubscription rate of 5%. a share which appreciates by 50% over the incentiveperiod produces a gain of 1, 000% gross (or 700% net) on the initial outlaywhich is not without its attractions! The share price may, of course,go down but even here some schemes are "fire-proof" and guarantee theexecutive against loss.

I see schemes of this sort as a means of producing more remuneration forcertain executives and am doubtful about the claims made that they actas incentives to greater effort. I think incentives are undoubtedly there ina small, expanding company but am not convinced that these arguments canbe carried out to the larger, well-established companies which in the mainare the companies to have introduced schemes of this type so far.Admittedly, some of those schemes link participation by the executive to theattainment of some corporate objective, such as an increase in profits ofa minimum amount. Where this feature is included, an incentive value doesexist. Probably two-thirds of the schemes, however, do not includeany performance targets and the incentive must then surely be more toreaching the necessary status to participate in the scheme than to greatereffort once this has been achieved.

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COMPANY CARS

This subject seems to generate more steam than almost any other item in thefringe benefit area. There seems little doubt to me that it is nowinextricably mixed up with status. In this paper, I am concerned with carswhich are provided only for selected employees, usually executives andsenior or middle management, for whom the provision of a car is notessential to the job. This is to be contrasted with those occupations, suchas salesmen, where a car is a necessity and is provided by the companyas an integral part of the job. I do not regard the provision of a car tothis second category of employee as a fringe benefit - quite often thevalue of having a company car which can, and almost certainly will, beused for private purposes is reflected in the direct remuneration which is paid.

In 1970, the British Institute of Management published the results of asurvey of the practices of 266 companies in regard to car expenses andallowances. The survey covered some 25 sections of industry and involvedcompanies of all sizes. 97% of the companies provided company carsfor some of their employees. So the practice is undoubtedly widespread.Nearly three quarters of the companies provide cars exclusively for theuse of individuals as opposed to operating the "pool" system (under whichthe company maintains a fleet of cars for the use of selected employeesbut no car is specifically allocated to an individual). The remainingquarter operate on a pool system or a combination of "exclusive" and "pool" .

In general terms there are two main methods of approach. In the firstmethod, the company pays all costs (both fixed and running expenses such aspetrol, oil, repairs etc) either directly or the employee pays them initiallyand is then reimbursed by the company in some way. The question thenis how the employee is to be charged for private mileage and here companypractice varies from charging the employee : -

nothing, all private mileage being paid by the company;

for holiday use only, private mileage at other timesbeing paid by the company;

a proportion of total annual costs based on privatemileage in relation to total mileage;

a fixed charge per (private) mile;

a fixed annual amount regardless of mileage driven.

Of these methods, the one which I believe is becoming more popular , isthe fixed annual amount. Currently, figures range from £60 to £120 peryear. It is usually possible to negotiate with the local inspector to gaindispensation for this practice so that, on the company certifying that theamount has been paid, the employee will not be liable for any income orsurtax in respect of the vehicle provided. With annual costs, includingdepreciation, tax, insurance, repairs, maintenance, petrol and oil,

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variously estimated at between £400 and £600 per annum (or more), inmost cases this approach represents a valuable benefit for the recipient.Even paying a rateable proportion of costs is attractive since depreciation isnormally excluded in determining total costs.

In the second method the company pays all costs except running expensesand the question then is how the employee is reimbursed for business mileage,The two commonest methods are : -

reimbursement for actual expenses incurred onbusiness mileage;

the payment of a fixed sum per (business) mile; thissum usually varies with the size of car involved but isof the order of 4p to 5p per mile (in 1970).

Under both methods, those arrangements which are hased on some calculationof private or business mileage can involve considerable administration toestablish accurate records of mileage travelled. They are not alwaysequitable since it is virtually impossible to allow for any under-estimate,by the employee, of his private mileage.

There is a trap for the unwary. If the company rents the car instead ofbuying it, the employee will suffer. The whole of the annual rental, whichwill be of the order of one quarter to one third of the purchase price of thecar, must be declared on Form P. ll .D and as such is potentially taxableas an item of remuneration. This makes the rental method look mostunattractive from the employee's point of view.

ASSISTANCE WITH HOUSE PURCHASE

This is one of the most widespread and most valuable benefits. A surveywas undertaken by the British Institute of Management among 66 membercompanies. The results published in 1969, show that well over 80% ofthe companies in the survey assisted employees to buy their own homes. Ingeneral terms, it appears that assistance is confined to staff employees,though a significant proportion of companies extend assistance to all gradeswhere an employee is transferred in the course of his work. There aretwo main methods of approach.

First, and more usual, the company simply stands as guarantor for themortgage. The essential details are as follows : -

arrangements are made with a broker (or sometimeswith an insurance company or building society), toprovide the necessary finance;

the company gives a guarantee so that the loan offeredis higher than that usually available to privateindividuals - loans of 100% of the purchase price ofthe new property can usually be obtained if the companyguarantees the whole (or the larger part) of thedifference between the normal advance and the purchaseprice;

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the loan is usually limited by the mortgagor to 21/3 or 3times the employee's salary to ensure that the serviceof the loan is not beyond his means. (For a repayment termof 25 years, the gross annual cost with interest at81/2% and inclusive of life insurance is approximately£ 11 per £ 100 of loan and it is probably not advisable,other than in exceptional circumstances for an employeeto commit more than 25% or 30% of his gross income tohouse purchase);

the company (usually) deducts the monthly repaymentdirect from the employee's salary;

if the employee leaves service, the arrangementusually continues uninterrupted, though in some casesthe employee is required to repay the guaranteed sum.

This method involves the company directly, but the financial cost is small andconsists primarily of administration, provided the initial check on theemployee's ability to repay the loan is thorough. As an alternativeto a guarantee, some companies make a grant in addition to the normalBuilding Society advance. This is often treated as an interest free loanrepayable over a short period, such as 5 years. The grant is usually smalland subject to a modest upper limit, such as £500 so that the financial costto the company is not significant. It is difficult to see how this form ofassistance is of much practical value.

In the second method, the company actually provides the necessary financeand uses capital which otherwise could be used in financing its own business.A special rate of interest is charged which varies between 2% and 5% withthe peak in the range of 3% - 31/2r%. This represents a significant cost tothe company. Loans vary from 80% (as a minimum) of the valuation up to100%. The method is to be found mainly in the banking and insuranceindustries.

The difference between the special and commercial interest rates is nottaxable to the employee so long as the company lends the money to theemployee. If the employee arranges a mortgage on commercial terms andis reimbursed by the company for interest in excess of the agreed minimumlevel, then the amount of company assistance is almost certain to betreated as additional remuneration which would then be taxable on the employee.

These are the two main methods of long-term financial assistance. For theshorter term, many companies also provide bridging loans, particularlywhere a company move is involved. These normally extend for up to 6 monthsand are often interest free.

All types of financial assistance, both short term and longer term, areattractive and they become particularly attractive in times when money istight and mortgages are difficult to obtain.

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PROVISION OF A COMPANY HOUSE

In relatively few cases, the company actually provides a house or alternativeliving accommodation. This is usually confined to accomodation providedfor specific categories of employee, such as security guards living in thegrounds of a factory or a caretaker, living in the flat above a block of offices.If the property is occupied by the employee as part of his job, he is notconsidered to be in "beneficial occupation" (to use tax jargon). He is nottaxed on the benefit even if living in the accommodation rent tree. This isthe general pattern, but a less liberal attitude may well be taken by theInland Revenue where the salary of the employee concerned is more than£2, 000 per annum.

If the accommodation is not essential to the job, then the employee isregarded as receiving a taxable benefit which, in general terms, is equalto the difference between the rent paid and the gross rateable value of theproperty. How much of this benefit would, in fact, be taxed depends on thelocal inspector of taxes, but there is certainly scope for agreement to bereached on a basis which is to the advantage of the employee.

There are many snags to this approach from the point of view of the companyand they include : -

capital outlay on property as opposed to its use forbusiness finance;

the involvement of the company as a landlord;

difficulties in terminating tenancies which may entailcourtproceedings with consequent adverse publicity.

In general terms, it is usually better from all points of view to lend theemployee the money at a reduced rate of interest to buy his own house thanto provide a company house.

ASSISTANCE WITH REMOVAL EXPENSES

Moving house is expensive, especially when all items of expense are includedAssistance is normally given where the move is at the request of the company(and this would extend to a new employee joining the company from anotherpart of the country) and only rarely where the move is voluntary.

Here are some of the major expenses of moving house : -

agents and solicitors fees on the sale of any existingproperty;

legal and other costs on redemption of any existingmortgage;

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survey fees, solicitors costs and stamp duty onthe purchase of the new property;

removal expenses and insurance of furniture andeffects;

increased prices for comparable property (significantif the move is from low-priced area to high-pricedone);

temporary accommodation for the employee and hisfamily until a suitable property is found;

costs of new furnishings (curtains, carpets etc.);

travelling expenses between locations(whilesearching for new property and supervising the saleof the old one);

school expenses, especially any penalty for leavingthe existing school, new uniforms etc.

The extent of assistance given varies greatly from company to companybut in general terms, would cover most or all of the items listed. Somecompanies also give time-off (up to 5 working days) to cover house hunting,removal and settling in.

HOLIDAYS

Although holidays are often not considered to be a fringe benefit, I do notagree with this approach and think they should be included in any review ofof fringe benefits. Levels vary widely from company to company and have adefinate bearing on the extent to which a job attracts and retains staff. I amconcerned with basic holiday allowances excluding customary holidays andextra allowances including long service entitlement. Several generalconclusions can be drawn from a study of the available material:-

holidays generally are increasing particularlyamong blue collar workers where there has beena marked shift towards longer holidays.

blue collar workers fare worse than white collarworkers.

among white collar •workers, differentials betweengrades have steadily reduced and are continuing todo so.

SICK PAY

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The results of an Industrial Society Survey (No. 153) are interesting.They relate to 1969 and show the very definate improvement in holidayentitlement from manual to manegerial personnel.

Grade Holiday entitlement (weeks)

2 or more but 3 or more but 4less than 3 and o v e rl ess than 3 less than 4

A comparison of the figures for the middle th ree grades shows how thedifferentials a r e narrowing.

The experience of the common marke t countries is relevant here sinceGreat Britain is current ly some way behind their p r ac t i ce s . The standardholiday allowance for all grades is 4 weeks; executives and seniormanagement often enjoy up to 6 weeks holiday. In addition, customary(or in some instances) statutory holidays a re more numerous . WestGermany has 12, France has 10 and Italy 16 which compares with 6 inGreat Britain (7 if New Year ' s day is included). If we join the commonmarket and harmonisat ion of working conditions is attempted, it is cer tainthat common marke t countries will not worsen their existing p rac t i ces .This is an additional factor which leads me to the conclusion that currentobservable t rends will continue.

Benefits payable during long- te rm sickness or disability a re not consideredhere since these , in my view, logically fall into the group which includesre t i rement and death in service benefits. I will simply comment that it isrelatively uncommon to find such benefits provided though I detect a trendamong companies and t rus tees to include them (or at leas t consider them)in any reorganisat ion of the benefit plan.

Manual

Manual(Supervisor s)

Clerical

Clerical(Supervisors)

Management

2 or more butless than 3

53%

21%

25%

13%

5%

3 or more butless than 4

47%

68%

73%

77%

55%

4 and over

-

11%

2%

10%

40%

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It is continuance of salary during short term sickness or illness withwhich I am concerned. Again, certain general conclusions can be drawn:-

most schemes differentiate between broadcategories of staff (usually the distinction isthe old white collar/blue collar one),

when differentiation is made, white collar workersfare better than blue collar workers

allowance for state benefits is usual and appliesto all categories

benefits increase with length of service

medical certificates of illness extendingbeyong three days are required at regularintervals and a final certificate when the illness finished

A typical pattern of benefits would read something like this:-

during the first 6 month's service, 1 week atfull pay for each two months' service

after 6 months' service, 3 months' at fullpay followed by 3 months at half pay.

rising after 20 years' service, to 6 months at fullpay followed by 6 months at half pay.

from these amounts would be deducted an amountequal to the basic State benefit for a single person,regardless of marital or dependancy status and ofeligibility for state benefits.

Costs are met out of the normal running expenses of the company anddo not usually require contributions from employees. Where these doexist, they are very modest. Costs vary widely and depend on:-

(i) the type of industry;

(ii) the proportion of manual employees (since their sicknessexperience is, on the whole, much heavier than for non-manual);

(iii) the proportion of female employees (since they have aworse sickness experience than males).

Expressed as a percentage of relevant payroll, the cost of the benefitpattern described above appears to average out at between 11/2% and 2% fornon-manual workers and is as high as 4% to 5% for manual workers.

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MEDICAL BENEFITS

This is a valuable and increasingly popular benefit. A number of schemesnow exist offered by certain insurance companies and provident associationsspecially set up for the purpose, which provide cover for surgical andhospital expenses, specialist fees, out-patient treatment (such asradiotherapy) and analogous medical expenses. It is open to any individualto effect cover under one of these schemes if he wishes, so why have Iincluded this item in my review ?

The reason is that, if the company participates in the scheme in some way,it is usually possible to negotiate terms for each member which are morefavourable than those which could be obtained by the individual himself.The principal operating here is that, analogous to free cover with grouplife schemes, the underwriting experience of the group, by reducingindividual selection, may be expected to be better than for a number ofindividual lives and costs should be lower. Factors such as these leadto group discounts.

The company can participate in one of a variety of ways:-

by providing simply the administration to collectcontributions regularly and remit them in bulk;members pay the whole cost themselves, effect coverto suit their own needs and claims are dealt withdirectly between the member and the insurer.

by paying, in addition, part of the direct cost;a basic scale of benefits is then usually providedwith the individual free to increase cover on avoluntary basis. The cost of the "basic" coveris shared between the employee and the companyin agreed proportions and the employee pays forthe whole of any excess.

by paying all the costs, both direct and indirect;membership is compulsory, the scale of benefits(which can be varied by grade or status) is pre-determined but there is little or no provision for theemployee to "top-up" his cover.

The greater the participation of the company, the greater the discountsoffered. The British United Provident Association is the largestorganisation in this field and the discounts range from about 20% to 331/3%

The cost of an adequate level of cover varies between £15 and £50 per yeardepending on the age of the member and the number of his dependants, so itis not suprising to find that the majority of employers offering this benefitdo so only on a minimal basis - they are only prepared to act as the"collecting agency" to secure discounts of up to 20% for members.Partially or totally paid schemes exist, in general, only for selected

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groups of executives and managerial personnel. On my understanding of thepresent Inland Revenue practice, employer's costs will be allowed as abusiness expense for tax purposes but the employee's tax position is far fromclear. Below the magical earnings figure of £2,000 per annum, I believethat the employee will not be assessed on the employer's outlay as additionalremuneration. However, above that figure, the cost of the benefit should beincluded on Form P. 11. D and it may well be taxable - it all depends on thelocal Inspector of Taxes.

This raises another point. If the medical benefits scheme is not insured,then my understanding of the situation is that the employee may be taxed on thebenefits as they are paid. There is no question of the employee being assessedyear by year on a notional cost but the amount of benefits received must be shownon Form P. 11. D. Whether they are then taxed as items of remuneration, infull or in part, depends on the local Inspector of Taxes.

In my view, the method of funding should not have any bearing on the employee'stax position and the present state of affairs is little short of deplorable. Itseems high time that it was clarified.

LUNCHES

For the small to medium sized company, luncheon vouchers are most commonamong those companies which do make some provision for their employees.For many years, the Inland Revenue has regarded the 3/- (now 15p) per dayas the maximum sum which the employee can be given without being liable totax on the amount involved. The excess over this amount is treated as additionalremuneration and is taxable. This may have been not unreasonable when it wasfixed some 15-20 years ago but today it hardly buys a round of sandwiches! Itis high time that this limit were reviewed.

For larger companies, canteen and special dining rooms become economicallypossible. It is quite common to find subsidised lunches of differing standardsprovided for different categories of employee, the usual distinctions beingbetween directors, senior management, junior management, "white-collar"workers and "blue-collar" workers. Some facilities are little more thanadequate and at the other end of the scale some are a little short of excessive.The quality of food, the provision of alcoholic drinks, self-service or waitressservice and the standard of comfort in general all tend to depend to a largeextent on status.

In 1970, it has been estimated that the cost of materials and labour alone incompany canteens was between £10 and £11 per annum per employee - andthis does not take into account notional (or actual) rent or depreciation. Themajority of canteens are self-operated and only about 25% of companies employcontractors.

I should also include, under this head, the provision of refreshments (such astea or coffee), either through canteen facilities or through vending machineswhich are becoming more popular as reliable canteen labour becomes moredifficult to find.

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S T A F F DISCOUNTS

This is another area where the company can be of considerable help toits employees without involving itself in anything more than minimaladministration costs. Arrangements are made with a number of companiesand suppliers for employees to be able to purchase goods at a discount.It is usually possible for the company to arrange for most of the normalrange of domestic consumer items, such as electrical and gas appliances,furnishings and even jewelery and glass to be available to its employeesat discounts ranging from 15% to 331/3% of the purchase price (excludingpurchase tax). The range can also extend to motor vehicles and accessories.

In my experience, in most arrangements of this nature, the companyprovides the introduction but the employee himself deals direct with thesupplier on a cash basis. One variant of this is to have a formal discountscheme under which all goods are purchased through the company. Thisis simply a method by which the company can recoup some or all itsadministration costs either by a direct "handling" charge or by allowinga lower rate of discount.

The value of this particular benefit to an employee obviously depends onhow much he spends on the goods concerned but there can be very fewemployees who cannot benefit from this type of scheme, especially if itextends to motorcars.

PURCHASE OF COMPANY PRODUCTS

This is analogous to the previous item except that the range of goods ismuch more restricted but the discounts offered are often higher. Hereare some examples:-

free travel on public transport, including alimited amount of holiday travel, is available toemployees of the nationalised transportindustries.

very attractive air travel discounts are availableto employees of air line companies and this oftenextends to close relatives. Employees of holidayand tourist firms pay far less for their holidays thanthe ordinary member of the public.

"cost plus 5%" (or something similar) is availableto employees of many companies (manufacturingcompanies, departmental stores etc.) for purchaseof the company's goods for their own personal use.

Discounts of this type, large or small, do represent a saving to those ableto enjoy them and they should not be ignored in assessing the value of"total remuneration".

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SEASON TICKETS

Companies can provide a benefit of real value to their employees by financingthe cost of season tickets to cover daily travel to work. This involves thecompany lending the employee sufficient money for him to be able to buy anannual season ticket. Usually the loan is interest free and repaid by theemployee by equal monthly deductions from his salary.

The attractions of the scheme to the employee include the following:-

an interest free loan is always worth having.

with fares rising on average at least once everytwelve months, there is a good chance of enjoyingseveral month's travel at the old rate.

an attractive discount is offered by SouthernRegion for annual tickets amounting to 11% of thecost of four quarterly tickets.

there is no immediate personal outlay.

The personal convenience of not having tobother with buying tickets for twelve months.

Taken together, these add up to quite an attractive arrangement. It isworth to the employee, in cash terms alone, a minimum of 20% of theloan and this ignores the aspect of personal convenience.

As regards the actual operation of the schemer-

cash loans to the employee should be avoided (theyare often used for other purposes).

the ticket should be bought by the company becauseit can then only be surrendered by the company andthis safeguards the arrangement

each employee should sign an agreement binding hinto repay the loan on appropiate terms and coveringthe repayment of any balance outstanding on leavingservice.

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SPORTING AND SOCIAL CLUBS

The facilities provided by many companies for recreation, in its widestsense, should not be excluded in any survey of fringe benefits. The mostobvious example is the company sports club.

The range of facilities varies very widely from company to company andincludes:-

extensive playing fields for cricket, rugbyfootball, soccar etc.

swimming pools, squash courts, tennis courts;

a club pavilion offering food and drink at cheapprices ;

organised dances and other social functionssuch as whist drives ;

residential clubs for week-end and holidayuse by employees;

other recreational activities such as dramaticand operatic clubs, music, photography.

Membership of the clubs is usually free or subject to payment of a nominalcharge, 5p or l0p per week. All functions and activities are subsidised bythe company and cost the employees far less than their actual cost. Manyrequire extensive equipment which would put them out of range of manyemployees.

From the company point of view, clubs of this sort are probably the bestway of getting employees to mix and get to know each other and from thisangle they must contribute greatly to building up the right team spiritand sense of identification with the company which are so necessary in anybusiness.

CONCLUSION

I have reviewed a number of fringe benefits which are provided bycompanies but there are numerous other ways in which companies canimprove what may be termed the "quality" of working life of theiremployees. This is a somewhat vague term but it is intended to cover anumber of benefits of a welfare nature which fall into several categories.First there are the general working conditions of which examples are officefurnishings, central heating and air conditioning, lifts, carpets, officespace, adequate lighting and a number of other similar items. Then thereare medical facilities, often provided on location,which include first-aidfacilities, accident and preventative treatment (such as flu injections andvitamin capsules), dental and chiropody services and protective clothing.Finally, there are a number of welfare items which include the provisionof'rest rooms and laundry facilities, hairdressing and clothing allowances.

X

Individually, each of these items is relatively insignificant, but takentogether they can form a significant part of total remuneration and could,in my view, be legitimately included as fringe benefits. There has beena noticable trend over the past few years towards providing more benefitsof the welfare such as I have listed above and I think there will be acontinuance of this trend in future. I think companies will come underincreasing pressure to provide good working conditions (in its widest sense)for their employees and I am convinced that money spent in this way amplyrepays itself by increased productivity.

Are fringe benefit programmes worth the money which is spent on them?Generous programmes are certainly of value in attracting new staff. Theycan also help to retain staff particularly where an employee cannot afford togive up some fringe benefits on a change of job - loss of accrued pensionrights is an obvious example of this but it is not confined solely to the pensionsarea of the benefit programme. I have commented briefly on the use anddesirability of the fringe benefits of the welfare type. As regards the otherbenefits which have been discussed in this paper, I am in some doubt thatthey do much to motivate the employee. It seems to me that extra directremuneration would, in fact, achieve a company's objectives more effectively -except for the higher income brackets where tax avoidence becomes an over-riding factor.

Despite the comments of the last paragraph, I think there will be a steadyexpansion of fringe benefits provided and also that the gap between blue collarand white collar will continue to narrow. So far, most attention seems tohave been devoted to developing benefits which have a direct cash value, eitherimmediately or in the future. But as real living standards rise, is it morecash incentives which are needed? I think we are beginning to see a changeof direction and that, in future, more attention will be devoted to providingmore leisure time. Instead of continued rises in salary rates, ever moreingenious incentive schemes and so on, why is more importance not attachedto longer holidays, shorter working hours or a more widespread use of suchthings as sabbatical terms ? (It is interesting to note that nearly 50% of ourmanual labour force is apparently entitled to less than 3 weeks' holiday butthere are nearly one million unemployed).

Perhaps I should qualify this last paragraph in one respect. Penal tax rateshave lead to highly attractive fringe benefit packages for senior executivesand this has probably been done at the expense of increases in directremuneration. There have recently been some welcome relaxations in themarginal rates of income and surtax. There may well be future reductionsand relaxations and if this is so I would anticipate an increase in directremuneration for top executives in place of an extension of fringe benefits.(This conclusion is reinforced by the fact that executive salaries in this countryare lower, job for job, than in the common market countries). For bluecollar workers, however, I think that the accent will be more on an increase inthe indirect elements of remuneration including better pension and death inservice benefits.

With high rates of taxation, fringe benefits tend to represent a significantproportion of total remuneration. As salary scales inflate, this proportionwill tend to increase (in the absence of reductions in taxation). If this isso, and the taxation system is at last partly responsible for unwillingness

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to pay the proper remuneration by direct means, why should fringe benefits notbe pensionable.

One final comment of immediate practical application. Form P. 11. D wasintroduced many years ago and it then only effected a small percentage ofemployees, this is no longer the case and the retentions of the originalearnings limit to £2,000 per annum below which the form is not needed, isnow unrealistic. In several places I have drawn attention to differences intaxation resulting from different methods of providing or financing a benefitwhich only emerges on form P. 11. D. This is highly unsatisfactory and onboth counts it seems high time that the Inland Revenue Authorities re-examined the use of application of this form.

Finally, I would like to thank all those friends and colleagues who have givenso generously of their time to help me write this paper. In particular I amgrateful to Mr. B. G. Lane for his help and encouragement in developingthis paper.

References:

The Problems of Totaand the United Kingc

The Problems of Total Remuneration in the European Economic Communityand the United Kingdom.

(Towers, Perrin, Forster & Crosby Inc. )

Guide to Share Incentive Schemes.(Institute of Directors)

Car Expenses and Allowances - Information Summary No. 147.(British Institute of Management)

Fringe Benefits for Executives - Information Summary No. 145.(British Institute of Management)

Company Housing Policy - Information Summary No. 141.(British Institute of Management)

Sick Pay.(E.G. Rutter & K. Ottaway)

Holidays - Pamphlet No. 153.(Industrial Society)