This column provides informative commentary on financial matters
Designing and implementing employee benefits has become big business in the developed world in recent years. Companies have a desire to attract and retain high quality staff and one way in which they can do this is to offer benefits which reward employees for their services in the manner which most appeals to them. Increasingly, firms are switching from a one size fits all benefit package to a system where employees can "flex" benefits. Examples might include exchanging holiday for increased pay or reducing pay to receive medical insurance. An important part of implementing any benefits package is to make sure employees appreciate what benefits they are entitled to and their value. Perhaps this is why flex benefits are becoming popular; if it is possible to flex most benefits into cash the employee can quickly calculate the equivalent salary to their benefits thereby making it clear what the cash value of their package is.
For some companies flex packages would not be appropriate. The primary reason is usually the administrative burden, particularly for large companies, where keeping track of say a thousand different benefits packages may be impractical without substantial investment in suitable systems. Another consideration is in heavily unionised industries - what if everybody flexes to receive maximum cash? Benefits which were previously unrelated to salary, like holiday and death in service benefits, may now result in a cash outflow for the company twice - once through an increase in pay when flexed and again when pay rises are negotiated with the unions. Careful planning and presentation may mitigate this possibility, though it may be a hard task to convince an employee why only part of their pay has increased by the amount of the rise.
For those companies which continue with a fixed package it is still possible to inform employees of the value of their benefits. Indeed as an employee in the United Kingdom, I would receive a statement from my employer detailing the value of all the non-salaried benefits. By showing the actual payments my employer made into my pension fund rather than just saying a percentage of salary was paid in, I appreciated the significant contribution they were making. Similarly, showing the premium my employer paid in respect of my lump sum death in service benefit, which I thought of highly, revealed that the cost of providing it is actually quite low. It could be argued that showing the value of a benefit is worth less than people think, is counterproductive, since an employee may now appreciate it less. However, it could equally be argued that by comparing the cash cost with the potential benefit the employee realises that it is a small price to pay should the worst happen. It could well be that if you gave employees a choice of an extra $100 dollars a month take home or a benefit of $1,000,000 for their family if the worst should happen, they may well keep the death in service benefit.
In Guyana, disclosure of executives' compensation in company's accounts has received much attention in recent years. Some have argued that the Companies Act requires it, others that it does not. Whatever the case, for financial periods beginning on or after 1 January 2005 International Accounting Standard (IAS) 24 Related Party Disclosures requires explicit disclosure of all compensation in respect of key management personnel, defined as "those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any director (whether executive or otherwise) of that entity."
Compensation is defined in detail and broken down into five broad categories - short-term employment benefits such as wages, paid annual leave, medical, use of vehicles and subsidised goods and services; post-employment benefits such as pension benefits; other long-term benefits such as long-term service awards; termination benefits such as severance payments and share-based payments such as share options and employee share schemes.
One area which I would like to be explored by companies which trade on the stock exchange is share based payments. This is an excellent way of making sure the interests of key management and personnel and shareholders are aligned. Compensating management largely through salary alone can lead to agency costs, which is a reduction in returns borne by the shareholders when management seek to maximise their personal wealth rather than that of the shareholders. Since most rational people will seek to maximise their earnings it is natural for them to want an increase in pay. However, management compensated by salaries are rewarded even when the company is doing badly. In Guyana I think the situations of the management teams' salaries being cut after a drop in earnings or shareholders voting for a reduction in director's fees, is unheard off.
If the management is rewarded with shares in the company then if the company is doing badly they will feel the pinch as their shares will be worth less. Conversely, a management team committed to increasing the value of the company will be rewarded if the share price moves up - along with the rest of the shareholders. No more so is this than when share options are issued, which give the right to buy more shares at a certain price called the strike. These options expire essentially worthless unless the value of the shares is worth more than the strike, giving the management team a very strong incentive to increase shareholder value.
Share-based payments have fallen out of favour in recent years - they used to be accounted for off-balance sheet and hence they were attractive to companies wishing to offer benefits which would not impact on the bottom line. In most jurisdictions there are now disclosures required, both in terms of the economic cost of issuing the shares in the profit and loss and/or the dilution effect on existing shareholders when new shares are issued. Indeed IAS 33 Earnings per Share requires calculation of diluted earnings per share and International Financial Reporting Standard (IFRS) 2 Share-based Payment requires recognition and measurement of transactions which are share-based. Two of the largest companies in Guyana both offer share schemes for their employees. It will be of interest to see what disclosures are made for periods beginning after 2005, when IFRS 2 comes into force.