A recent conversation with a new team member brought home to me just how important ESG has become to today’s workforce.
My colleague stressed that KPMG’s ESG strategy had played a big part in her decision to join the firm. It was a reminder of just how influential ESG now is in people’s career choices.
Of course, ESG affects organisations’ people in many different ways. It’s linked to everything from reward and remote working to health and well-being – all of which have tax attributes to consider.
Executive compensation
A company’s leadership team has ultimate responsibility for delivering its ESG goals. And so increasingly, we’re seeing the variable components of executive pay packages being tied to the delivery of ESG strategies.
Getting ESG metrics right – whether in short-term bonus schemes or long-term equity plans – is vital when linking senior compensation to ESG.
Equity-based incentives offer scope for tax efficiency by using statutory, tax-advantaged plans. But these must be looked at in the context of the organisation’s wider ESG strategy, to ensure they’re compatible with it.
Workforce benefits
Your ESG objectives can’t be achieved in a vacuum. They have to be embedded in an organisation’s culture, so that they reflect the values of the workforce.
As such, organisations should be thinking beyond their senior execs when aligning reward and ESG. They need to include the whole workforce – for example, by offering green benefits such as electric cars, bike-to-work schemes and more.
At the same time, employees are demanding responsible benefits. Research from 2021 found that 51 percent want to see their pension schemes invested in environmentally and socially sustainable organisations.
Close business partnering between the tax and HR functions is essential, so that programmes are implemented with suitable governance frameworks, processes and controls. One way to address your stakeholders’ concerns is to publish – and align – a tax strategy and a social responsibility policy.
With the ‘S’ of ESG in mind, firms are also looking to make benefits accessible to the whole workforce, not just management. But that creates its own challenges. For example, salary-sacrifice schemes could take some employees’ pay below minimum wage, if not carefully implemented. That can lead to the business being named and shamed, or even given a large fine.
Hybrid working
Remote working arrangements can have far-reaching tax implications when they cross borders – even those between the devolved nations of the UK.
An organisation based in one country, with staff working remotely in another, risks inadvertently creating social security obligations, and potentially a permanent establishment, in that second jurisdiction.
That can lead to local payroll, tax and social security obligations for the firm and the employees in question. And for the company, it can mean a corporation tax liability, not to mention compliance obligations relating to immigration and the right to work.
This has become a real headache for tax functions, given the hybrid-working culture that has arisen since the pandemic – and which employees now expect as standard. Social security obligations, or even permanent establishments, can be created without the tax teams or the wider HR function team realising.
Within reason, employers will want to offer staff the flexibility to work where they wish. But tax and legal teams will have concerns about exposure and compliance. Collaboration will be key to reconciling these conflicting aims; managing the implications of working from anywhere; and establishing systems to track where people are working in today’s digital world.
Health and wellbeing
Many employers will want to do more to support their employees amid the cost-of-living crisis and growing pressures on the NHS.
Where health is concerned, private medical cover is typically offered as an employee benefit at management level and above. That doesn’t sit easily with the drive for inclusive reward. Plus, the productivity gains from reduced absence will contribute to the cost of universal healthcare provision.
Employers might also consider offering financial help, via initiatives such as a staff hardship fund, early salary drawdown or financial awareness education. These can be implemented internally, or via third parties – though internal operation may require dedicated steering committees and governance frameworks.
From a tax perspective, donations to a charitable hardship fund can be more efficient. What’s more, your staff can receive tax relief if they choose to donate through Gift Aid.
Other ways to support workers include pay rises; one-off payments; employee ownership schemes; and cost-reduction initiatives in the form of retail discounts, free canteen meals and so on. Obviously, each of these will have their own tax considerations to manage.
