Business Advice Centre

Sunday 25 September 2016

Matching reward with results in the ongoing war for talent

Employee retention is key to any successful business - so take steps to incentivise your workforce, says Sarah Connellan of Ernst & Young

Sarah Connellan

Published 02/08/2015 | 02:30

Rewards should be flexible, says Sarah Connellan
Rewards should be flexible, says Sarah Connellan

The return of growth to the Irish economy and a renewed confidence in the Irish business environment has resulted in an increased level of activity in the Irish employment market.

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This has led to a surge in the number of job vacancies, increases in staff turnover, longer recruitment periods, and a greater pressure for employers to be competitive by remunerating employees effectively - each representing a significant additional cost to the employer.

As a result, employees have more opportunities available to them and a greater ability to negotiate when it comes to remuneration and choosing employers. Recruiting, motivating and retaining top talent has returned to the forefront of the employer's mind and an effective, competitive and flexible reward strategy has become more important than ever when competing for the attraction and retention of talent.

Financial reward can be divided into four main categories:

  • Basic (basic salary or cash allowances)
  • Benefits (employer paid medical insurance or gym membership)
  • Short-term incentives (annual bonuses or commission payments)
  • Long-term incentives (pension contributions or share awards)

A robust reward package should contain at least one component from each of these categories and be linked to the performance of the employee and value the employee creates for the business. A powerful reward package should also be flexible, transparent and communicated effectively to all employees.

In Ireland, remuneration such as basic salary and cash allowances cannot be delivered tax efficiently because of the current high rates of employment taxes and the additional charge to employers' PRSI (in general at a rate of 10.75pc) that these types of cash payments attract.

This is the case for all employers, whether they are a small private company or a larger multinational corporation. Therefore, employers have begun to look towards other components of reward as a means of incentivising their employees.

Benefits

A key component of any reward package is the provision of a benefit (ie: a non-cash payment).

A benefits package with a number of different constituents can act as a strong attraction and retention tool. Flexible packages can contain additional holidays, education fees, travel passes or increased employer pension contributions.

Certain benefits can be delivered tax efficiently in Ireland. For example, meals to staff in a canteen can be provided tax-free (where meals are provided to staff generally). Travel passes can also be delivered tax-free once certain conditions are met. There is also a small benefit exemption whereby an employer can provide an employee with a small non-cash benefit to the value of €250 per annum without attracting PAYE, USC or PRSI.

Employer pension contributions to Revenue-approved schemes remain one of the most valuable benefits that can be provided to employees tax-free and are particularly valued by the middle-aged employee and at senior management levels. This is of particular relevance now that most employer schemes have switched from defined benefit to defined contribution schemes.

Short-term or long-term incentives

Similar to basic salary and cash allowances, the delivery of short-term incentives such as cash bonuses or commission payments is not particularly tax efficient for the same reasons.

However, deferred cash bonuses can still be used as a retention tool by employers due to the requirement that the employee remains employed during the deferment period. This may be advantageous if it is expected that the marginal rates of tax may reduce over the coming years.

Long-term incentive plans and, in particular, share awards have become much more prevalent.

Share schemes

Share schemes can be tailored to meet the needs of the employer and are a useful means of rewarding and retaining key talent when they are linked with either employee performance, the performance of the business, or both.

However, the use of share awards as a means to incentivise employees is predominantly advantageous for public companies.

Some small private companies are awarding their employees with shares or share options subject to a restriction on the employee's assignment or sale of the company for a certain number of years - or to forfeiture where performance conditions are not met. Once certain conditions are met, these types of share awards can be tax efficient. The taxable value of a restricted share is reduced by virtue of the restriction placed on it, and forfeitable shares can be awarded to employees when they have a low taxable value.

These types of share awards can be used as a retention tool where the employee is required to remain in employment until the restriction is lifted or the risk of forfeiture is removed in order to benefit from the share award (for example, when performance conditions are met).

Privately owned businesses in Ireland can find it difficult to compete with larger public companies in terms of offering share awards to employees, mainly due to the lack of a ready market for the sale of a share in a private company.

Broader definition of reward

While financial reward packages remain an important tool in competing for key talent, there has also been a switch in the employee mindset resulting in the definition of reward becoming much broader.

Reward, in its traditional financial sense, has become a basic expectation for most employees. Employees have become more focussed on the broad definition of reward which includes alignment of business purpose with how the employee's role contributes to this purpose and to the overall strategy of the business.

Therefore, regardless of the make-up of the financial reward package, each component of reward needs to be transparently linked to business strategy and the value that the employee is creating for the business.

Enterprises with a clear purpose that adopt this approach are rated as some of the best places to work worldwide. These organisations are providing the employee with what they want - that connection between the purpose of the business, their role and their reward package.

Sarah Connellan is a tax partner at Ernst & Young's human capital division

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