Research suggests that many companies have remarkably similar performance and reward schemes, which presents an opportunity for businesses to reduce costs and motivate key players through innovative benefits packages.

An increasingly important issue is the credit crunch, which has impacted heavily on equity incentive schemes.

Volatile share prices mean that existing equity-based incentive schemes may not deliver value – or at least create a perception that this could happen – which detracts from the appeal of equity-driven rewards.

From the executive's point of view, cash rewards can appear more attractive, yet the current climate means businesses are less able to fund large pay awards because controlling costs is at the top of the agenda.

One option is to review the performance targets attached to the incentives that senior executives must hit in order to gain short-term annual bonuses and longer-term incentive rewards.

This puts remuneration committees – the bodies that decide on issues relating to executive pay and reward packages – in a particularly difficult position.

On the one hand, they must keep top executives incentivised to drive the business forward through choppy economic waters; on the other, they must satisfy major shareholders and institutional investors who often feel that if they are having to feel the financial pinch of a slowdown, so should the people at the helm.

With some justification, major investors point out that the whole concept of linking incentives to equity is to align the interests of the shareholders with those of the executives.

Conversely, the beleaguered executive might say that the lowering of targets during an economic downturn does not necessarily make them easier to hit. Indeed, it could be argued that adjusting expectations to reflect difficult trading conditions is simply an equitable way of keeping the playing field level.

Companies can see themselves through these difficult times by reviewing current executive arrangements, including performance targets, and having open dialogue with investors
to balance the needs of shareholders with those of executives.

Businesses can also stand out from the crowd by introducing a range of efficient incentives for the workforce. For example, smart pensions and salary sacrifice are very cost effective, while cash-based annual bonus schemes can be made more affordable by relating them directly to profits.

It is important to keep in mind that it is not always the most costly incentives that individuals appreciate most. Better still, there are a number of tax-related benefits that are mutually advantageous for both executive reward packages and a business's balance sheet.

For the general workforce, salary sacrifice is a well-recognised concept that involves companies using specific
tax exemptions to provide employee benefits without the need to pay income tax or national insurance contributions (NIC).

Pension funds provide a vivid illustration of how sharing the savings between employees and employers can provide extra benefits. Staff can obtain income tax relief at their highest rate and the firm will be able to offset the contributions against corporation tax, which applies to the whole pension fund, not just the salary sacrifice element.

Under a typical salary sacrifice arrangement, the employee's contributions to the pension scheme are effectively replaced with employer's contributions. At the same time, the employee agrees to a salary sacrifice equal to the amount of the contributions previously
made.

The arrangement generates cost savings to the employer from the reduction in NIC, while employees benefit from an increase in net pay as a result of the reduction in employee NIC. Meanwhile, the contribution to the pension fund remains the same, while companies can share savings or enhance contributions.

The different ways of delivering pay and reward must strike the correct balance between keeping staff happy and healthy cash-flow. In this challenging economic period, all employers would be well-advised to look for new and innovative ways of rewarding key executives and productive staff.

Laura Winkworth, senior manager in the Yorkshire performance and reward team at business advisers Ernst & Young.