Some firms allow staff to spend their bonuses through flex, but opinion is divided on its merits. Kylie Harrison reports

For a number of years, companies have allowed employees to save large chunks of National Insurance (NI) by sacrificing their bonuses into their pension.

Following changes to the law allowing employees to pay up to £225,000 into a pension plan in any one year, it has become even more attractive. More companies, therefore, implemented this practice and extended it to lower-level employees.

The process is typically paper-based, but some have put it through their flexible benefits. Thomsons Online Benefits managing director Michael Whitfield says: "There are obviously tax reasons for paying bonuses through flex, but flex is not just a tax mechanism, even if some fat-cats in the City believe it is. It is also the whole idea behind total reward."

He explains that every time an employee goes to their flex home page, it reinforces the value of their total reward. How widespread this is, however, is debatable. Whitfield says it is becoming more common as flex itself becomes more prevalent.

However, few people use bonuses within flex, says Watson Wyatt head of flexible benefits consulting Kim Honess, although they do use flex with total reward, which includes bonuses. Perhaps their lassitude stems from the continuing disparities between flex and bonuses; while bonuses can be issued quarterly, a flex plan is typically chosen once a year.

Vebnet head of flexible benefits Marcus Underhill reports that this will change, and flex will evolve to reflect people's desire to change more frequently. Honess, however, envisages problems: "Certainly in the City, bonuses can be issued quarterly, but you donÕt really want people changing their flex every quarter. People are more likely to think seriously about it, if it is once a year, than if it is available all the time."

Decisions, decisions

Experts also disagree on what benefits staff can spend their bonus on through flex. Towers Perrin principal Helen Freeman says: "Many companies use bonuses for pension contribution. It is not just a City phenomenon, but I haven't seen that much in the way of more general use of bonuses in flex schemes."

One example she identifies is Royal Bank of Scotland, which offers employees two flex cycles, including one at bonus time. "It lets employees buy private medical insurance (PMI) or health screening as a lump sum, rather than monthly," she says.

According to Whitfield, however, bonuses can be used to buy everything from salary sacrifice for childcare vouchers, pensions or tax-free bicycles, to increasing PMI or adding a dependent. "There is more innovation coming into people's use of bonuses within flex. It has moved on from a very boring type of arrangement with pension, medical and life insurance to a great range of benefits," he says.

Whitfield highlights a couple of pioneering uses, including the offer of non-vocational training through flex and one company that offers a car pool of sports cars, which employees can buy a share in each year.

Honess also points out staff putting bonuses into share incentive plans (SIPs): "We recently put a SIP into flex for a major company, and it doubled its uptake." Honess says the use of bonuses in flex can even affect what employees do with their base pay.

"Some companies are allowing employees to decide how much they want in pay, and how much in benefits. It is the ultimate in total flexible reward. You are trading a certain amount of security. Some people have a higher risk appetite and a stronger view of their abilities to get a large bonus. It is something we are working on with a FTSE 100 company."