Flex is a more supple way to reward employees. Laura Slattery reports on a trend that's taking hold

You have been waiting your whole working life for a job where the employer does something more than just leaving a slip of paper on your desk every month confirming that your bank account has been credited by x amount and that the company pension fund is still haemorrhaging your contributions.

Finally, you land a job where the employer throws in a few perks, say health insurance - VHI band D - for you and your family. The trouble is, your spouse has just been granted the same benefit. What do you do? Tell your employer "it's okay, I already have that, you can keep your money"? Or negotiate to get something else in exchange?

Under an approach to employee benefits currently being promoted, you wouldn't have to turn down your employer's offer or even sign up to it in the knowledge that you have duplicate health cover to no real advantage. You might not even have to argue your case.

Instead, at the outset, you could simply select an alternative benefit of equivalent value from a list on the company intranet or software program: point and click on another week's holidays, perhaps, or membership of a swanky health club or even the practical option of an annual commuter ticket.

According to Mr Raymond McKenna of KPMG's human capital division, adopting a flexible model of paying people, rather than a one-size-fits-all package, can work to the advantage of both employer and employee.

Under the "flex" model, the company's reward package for employees would be divided into core benefits plus an allowance to spend on a shopping basket of add-ons to suit their needs.

"Someone could say 'I don't believe in taking 25 days' holidays, I want you to invest that money in my pension scheme'. Somebody else might say 'I have no interest in a pension scheme now, I need cash to pay my mortgage'," says Mr McKenna.

Multinational companies, he notes, typically provide health insurance for both husband and wife: in the situation described above, an employee "could be throwing away over a €1,000".

It wouldn't be a total free-for-all: employers can't have discretion over the statutory entitlement to 20 days' holidays, while they might feel uncomfortable showing up at an employee's funeral if there was no life insurance in place.

They may also feel that it is their duty to keep in place a pension scheme that will eventually produce an adequate level of retirement income for their employees. Then again, they might not.

Once it was held up as the pinnacle of all career moves to secure a nice, pensionable job for life. But good pension schemes are expensive and getting harder to enter. The last three years of investment market decline has eroded the pension scheme surpluses built up in the 1990s, when equity markets were booming, notes Mr McKenna.

Companies operating defined benefit pension schemes, where employees are promised a pension based on a proportion of their final salary, now face significant contribution increases to bridge this solvency gap, he says.

Some are already switching to a defined contribution pension, where they commit to contribute a set percentage of the salary each year to a fund invested on the stock market.

"The employee takes the risk of the investment markets going south," says Mr McKenna.

Both sets of employers are likely to want to keep pensionable pay down as best they can. Offering seeming glamorous benefits like share option schemes is one way of doing this that also keeps employees happy in the short term.

But employees are beginning to view share options as a something of a fad from the tech bubble era. Many are now valued at less than their original issue price and some employees may have a tax bill attaching to the grant of the share options that could be higher than their current price.

"People haven't got the appetite for share options anymore, although perversely now could be a good time for them because you would be getting in at low values," says Mr McKenna.

An approved share participation plan, however, could have tax advantages.

"You could get a €5,000 bonus, take it in cash and pay income tax and PRSI, or you could put some or all of it into the share participation plan. Once it is held in trust for three years, you can then take the original sum back and only be taxed capital gains tax on the benefit."

"Flex" is about finding ways to reward people that are creative and tax-efficient. Simply tagging the traditional number-one executive perk - a company car - onto the end of a contract is neither.

From January 2004, companies will face an increase in their PRSI costs as PRSI is extended to benefits that are subject to tax (BIK), explains Mr McKenna.

This means that company cars, club subscriptions and other benefits that were previously exempt from PRSI will now be in the PRSI net, with the responsibility for collection of taxes and PRSI transferring to the employer.

In terms of employee benefits, the tax system firmly promotes use of public transport, as employers can buy "taxsaver" commuter tickets for staff use on CIÉ and Dublin Bus.

But offering flexible benefits is not just a tax-saving mechanism for the employer, according to Mr McKenna, it also offers choice to the employee.

Choosing which healthcare plan people want is an individual decision, he believes.

"People ask 'is Bupa cheaper?' There are all kinds of complexities about the type of cover available under VHI and Bupa. So companies will say 'we're going to give you the same spend, say €1,000, for healthcare. You choose'."

Or they could tempt employees with a cash alternative. "Plan C or Plan D could be worth €1,500. So they could say 'here's €1,500, what do you want to do with it?'" A younger employee in good health might decide that VHI Plan B or Bupa Essential Plus is good enough and take the rest of the allowance in cash.

Similarly, people might agree the need to fund their pension - just not right now.

"Throughout an individuals' lifetime, their benefit needs also change with greater emphasis on short-term savings and cash in early years transitioning to a greater focus on medium to long-term savings and family benefits," Mr McKenna says.

So is there a risk that, given the option, employees might opt for the extra holiday entitlements every time and put off saving for retirement until the last minute?

Certainly, there is a need with flexible pay to "get the communications right", says Mr McKenna.

Even at the moment, some employees don't know what health insurance plan they are on or what the terms of their pension scheme are, he notes.

"Our experience would be that very few people take the cash option. Most people see the tax efficiency of pensions or decide that they need healthcare," he says.

Giving employees the choice can make them more aware of how much their total remuneration package is actually worth, he adds.

All of this might sound like something people who sit in boardrooms and plush offices would be offered, while employees who have a piece of plywood separating themselves from the next person would continue to make do with salary plus basic pension contribution.

Executive-level employees would have a bigger spend with which to play and would be more valued by their employer, Mr McKenna admits, but the cost-effectiveness of the flex model means it has the potential to be extended to other employees.

Companies such as SAP, Novell and KPMG itself have already turned to flex, while others are implementing it on a pilot basis.

Meanwhile, a recent survey by ICM Research in the UK has indicated that managers would like to swap benefits for more than just other benefits.

In the survey, conducted in association with a property development company, nearly half of British managers said they would sacrifice €1,000 of their salary, their company car, private medical insurance or one week's annual leave in exchange for a more comfortable, better designed workplace.