Draft legislation that is currently plodding through Parliament is threatening to rip the heart out of the incentive business at a time when motivation is crucial. If there is a recession looming, competitiveness will be at a premium and motivated staff will be the greatest assets a company can have. The proposed changes could also reduce employees’ take-home pay and fuel wage inflation.
This is the voucher industry’s perception of proposals included in the Social Security Modernisation Bill, announced in July 1997 by the Social Security Secretary Harriet Harman, and scheduled to come into effect next April.
The law is expected to say that non-cash incentive schemes for employees will be subject to National Insurance Contributions (NIC) for the first time. The fine details are yet to be announced (another complaint from voucher companies is that the consultation period, which began in August this year and is still not complete, has been far too brief), but the law will probably cover everything from Luncheon Vouchers (see page 63) to incentive schemes such as Capital Bonds, and possibly go so far as to include Air Miles and other frequent-flyer programmes.
This has all been triggered by a couple of well-publicised cases in which companies paid some of their employees’ salary in vouchers, to avoid National Insurance. But these cases were exceedingly rare. Generally, argues the industry, vouchers are used as a premium on top of salary to act as a motivational tool.
“Clearly the Government needs to be seen to be closing loopholes,” admits Graham Povey, managing director of Capital Incentives, the company behind Capital Bonds. “But avoidance is not really the issue. The vast majority of companies are not using vouchers to avoid NIC, but for staff motivation.”
At its most stark, critics say that the imposition of NIC on vouchers will reduce rather than increase government revenues. One calculation, from PR consultancy Bluebear, paints a bleak picture: when first announcing the proposals, Harman said the change in the law would generate an extra 10m in NIC – though how this figure was arrived at remains a mystery. Bluebear argues that the revenue brought in by the extra NIC could be wiped out – and more – as the productivity of demotivated staff plummets. If the profits of UK plc start to tumble, so will the total amount of corporation tax paid to the Government – and possibly by a great deal more than the predicted 10m increase in NIC.
And this is assuming that companies carry on using vouchers, but adjust the level they give out in order to hold back the 20 per cent they will need to pay the tax on behalf of their staff. But if companies reduce their voucher hand-out by 20 per cent, employees may demand that 20 per cent by other means, so fuelling wage inflation, one of the last things the Government would want to be responsible for.
Paul Hunter, marketing manager at Kingfisher Gift Vouchers, says: “If you take vouchers away from employees, they will demand the money goes on their salary instead. The whole idea is ill-conceived.”
Hunter points to another potential downside: “Say you have a salesman getting a 500 bonus in the form of a voucher that he spends in Comet. This fuels the UK economy. Now is not a good time to be taking that away.”
To point out aspects such as this, the voucher industry has rallied behind the Voucher Association (formerly the Voucher Industry Forum), which has appointed lobbyists Westminster Strategy to beseech the Government to consider the consequences of this legislation.
They also outline other aspects about the imposition of NIC that may discourage companies from using vouchers: “The mechanics of reporting National Insurance is something that hasn’t been considered,” says Povey of Capital Incentives.
National Insurance is a lot more complicated in administrative terms than income tax, explains Povey. Many companies have staff that are paid different bonuses each month, according to targets met and profits earned. From the point of view of income tax, this is relatively uncomplicated: a company can choose to pay all the tax at the end of the tax year. When it comes to National Insurance, however, returns have to be completed monthly along with the payroll. If vouchers are used to reward high-achieving members of staff, the paperwork for the payroll department will become substantially more complicated. This will be exacerbated, adds Povey, by the fact that vouchers currently tend to be administered by the sales and marketing department, and not dealt with through payroll.
One reason for the success of vouchers has been their easy administration. If these advantages disappear, companies may respond by turning to other motivational tools, but each is flawed in its own way.
If there is no longer a tax advantage to vouchers, the first thing companies might do is simplify things by giving out the cash equivalent instead. But incentive companies are quick to point out the error of this approach: “Ultimately, some people will revert to cash,” says Bill Brown, general manager of Whitbread Leisure Vouchers. “But with the best will in the world, cash disappears on fuel bills and the like. It doesn’t have a strong motivational impact.”
“There are lots of documented reasons not to use cash,” adds Povey. “The incentive must be separate from salary so that you can remember what you bought with it. There is no ‘trophy value’ for cash.”
As yet, it seems, certain motivation schemes are not going to fall under the law, so companies may be tempted to opt for these – at least until the anomalies are recognised and the Government turns its attention to them. One of the incentive tools that slips through the NIC net is the use of merchandise catalogues, but, again, there are many disadvantages. “Everyone has a TV and a toaster,” says Brown, “so these are completely unmotivational.”
“Merchandise is extremely costly and the nature of the product is limited to the contents of the catalogue,” explains Povey. “Items have to be delivered and there are problems if they arrive broken or product lines go out of stock. You have to employ an outside agency to handle hassles and that costs more. Merchandise is a thing of the past. It will never work.”
Another staff incentive that will not incur NIC is the holding of parties or events: “A one-off party is OK,” says Kingfisher’s Hunter. “But how old-fashioned is that?”
Some incentive travel, too, will not fall under the NIC law and companies that provide these incentives are eager to step into the breach: “The NIC ruling does not apply to our promotional schemes,” says David Lebond, managing director of Brevis Marketing, which offers holiday incentives, “as the vouchers we supply are money-off as opposed to face value”.
The anomalies are unlikely to remain for long. “It won’t be long before everything used for motivation is included,” believes Paul Michaels, sales manager for Virgin Vouchers, “and it’s only fair that if NIC goes on vouchers, it should go on everything else used as an incentive”.
This raises the prospect of all sorts of administrative nightmares. If frequent-flyer schemes fall under the hammer, for example, some way will have to be found of differentiating between points gained corporately and privately.
All of which makes good old vouchers start to look like relatively simple and highly effective tools once again. Steven Stanbury, vice-chairman of the Voucher Association, believes their future is assured: “The reality is that vouchers will survive. They are still a tangible, flexible and motivational way to communicate with people, enabling them to buy things they may not otherwise buy.”
While the proposed legislation will not kill off the voucher industry – two-thirds of Capital Incentives’ business, for example, is in third-party motivational schemes and NIC will not apply to these – it will cause a major headache, both for the voucher companies and for the clients using them. The result is likely to be some reduction in the use of vouchers as an incentive.
Whitbread’s Brown issues a warning: “Take this analogy: Companies used to do a lot of staff training. In the last recession, many of them stopped. But those that didn’t came out far better at the end and recovered much more quickly.”