Flexible Compensation: What It Is and How It Works

Key Points

1 Flexible compensation is a voluntary arrangement under which employees allocate up to 30% of their gross salary to goods or services that benefit from favourable tax treatment, in accordance with Article 26.1 of the Spanish Workers’ Statute

2 The most common items are meal vouchers, public transport, private health insurance, nursery vouchers and training, as regulated by Article 42 of the Spanish Personal Income Tax Law (IRPF)

3 46.3% of Spanish companies already offer flexible benefits, up from 42.5% in 2024, according to the Mercer Total Remuneration Survey 2026

4 A well-designed scheme can generate average annual savings of more than €1,300 per employee, without increasing the employer’s direct salary cost.

5 Success does not depend on the breadth of the benefits catalogue, but on governance, employee education and operational traceability.

6 Key risks include exceeding statutory thresholds, weak internal communication, inequity between employee groups and implementation errors.

Flexible compensation is a voluntary compensation model under which an employee allocates part of their gross salary—up to 30%—to goods or services with favourable tax treatment, within the limits set by Article 42 of Spanish Law 35/2006 on Personal Income Tax and Article 26.1 of the Spanish Workers’ Statute.

This model has become an effective compensation lever for organisations seeking to improve the perceived value of total reward without resorting to across-the-board increases in fixed pay. In practice, it allows each professional to voluntarily allocate part of their gross salary to selected goods or services that benefit from favourable tax treatment, within specific limits and conditions—for example, meal vouchers, public transport, private health insurance or nursery vouchers.

According to the Mercer Total Remuneration Survey 2026, conducted among 700 Spanish companies with more than 100 employees, 46.3% of companies already offer flexible benefits as part of their reward package, compared with 42.5% in 2024. However, the real challenge is not whether a company offers flexible compensation, but how the programme is designed and implemented. When treated merely as a list of benefits, friction quickly emerges: low take-up, recurring questions and, in the worst cases, operational incidents caused by insufficient control over thresholds or weak implementation.

“In People & Talent, we see a clear pattern: when a plan is launched without governance or employee education, it is perceived as ‘small print’. When it is well explained and integrated into the compensation policy, it becomes a genuine differentiator for retention,” says Alberto Diez de Celis, Director of People & Talent at RibéSalat.

Below, we explain what flexible compensation is, how it works in practice and which criteria companies should consider to implement it with legal certainty, operational control and a coherent employee experience.

What is flexible compensation?

Flexible compensation is a system under which employees voluntarily decide how to receive part of their annual remuneration, replacing a portion of cash salary with benefits in kind—for example, private health insurance, transport, nursery vouchers or meal vouchers—with tax advantages where legal requirements are met.

Unlike a traditional salary increase, flexible compensation does not increase the employer’s direct labour cost: it redistributes the structure of the remuneration package by making use of tax exemptions recognised by the Spanish Tax Agency. The employment law framework is set out in Royal Legislative Decree 2/2015 of 23 October, approving the consolidated text of the Spanish Workers’ Statute. The operational rollout—benefit catalogue, communication, implementation and governance—is covered in this complete guide to implementing flexible compensation.

Flexible compensation vs. employee benefit vs. benefits in kind

It is important to distinguish between three concepts that are often confused:

Flexible compensation: the employee allocates part of their gross salary to items that benefit from favourable tax treatment. It is not additional salary.
Employee benefit (on top): the company bears the additional cost (for example, by paying for private medical insurance without deducting it from salary).
Benefit in kind: this is the legal form through which part of that remuneration may be delivered; it is subject to statutory thresholds and must be correctly reflected in payroll.

Why offer it: from tax efficiency to talent and operational impact

The value of flexible compensation goes far beyond tax-efficient salary structuring. In a market where attracting and retaining talent requires more personalised propositions, these programmes make it possible to tailor compensation to different realities within the same workforce—mobility needs, life stage, family responsibilities and wellbeing preferences.

Higher perceived value without increasing payroll cost

The best-known advantage is that, by allocating part of salary to items that receive favourable tax treatment, employees can improve their disposable net pay without necessarily increasing the employer’s direct salary cost—provided the plan is correctly implemented and remains within the thresholds set by tax legislation. Industry studies estimate average annual savings of more than €1,300 per employee, rising to €2,500 in cases where the available benefits are fully used. This is one of the reasons why flexible compensation has become an effective tool for maximising salary value in inflationary environments.

Wellbeing and employee value proposition

When properly integrated, flexible compensation strengthens the employee value proposition: it facilitates access to recurring everyday services—such as workday meals, mobility or childcare—and can include benefits perceived as strategically important, such as health cover, always within a responsible framework and without making generic promises.

“There is no universal catalogue: segment-based design is what makes the difference between simply having a plan and having a plan that is genuinely useful,” says Alberto Diez de Celis.

Which items are usually included and what requirements must be met?

Plans typically include frequently used benefits with established tax treatment: meal vouchers, public transport, nursery vouchers/early years education for children aged 0–3, private health insurance and training.

According to the Mercer Total Remuneration Survey 2026, the most widespread flexible benefits among Spanish companies with more than 100 employees are private health insurance (79.3%), training or higher education (70%) and transport vouchers (69.5%).

30% limit and protection of the Spanish National Minimum Wage (SMI)

Benefits in kind are legally capped: employees may allocate up to 30% of their gross salary to flexible compensation, and participation must be strictly voluntary. Article 26.1 of the Spanish Workers’ Statute expressly states that “salary in kind may not exceed thirty per cent of the employee’s salary entitlements, nor may it reduce the full cash amount of the statutory minimum wage.”

In addition, the remaining cash component must continue to meet the applicable minimum thresholds—an especially important point for salaries close to the current Spanish National Minimum Wage (SMI).

Standard items and current exemption thresholds

For clarity, and without addressing specific case-by-case scenarios, the thresholds established by the tax rules in force for 2025–2026 are as follows:

Item	What it covers	Tax exemption threshold
Meal vouchers	Meals during the working day	Up to €11 per working day (Art. 42.3 Spanish Personal Income Tax Law)
Public transport vouchers	Commuting on collective public transport	Up to €136.36 per month (approx. €1,500 per year)
Private health insurance	Premiums paid by the employer	Up to €500 per year per insured person (€1,500 in the case of disability)
Nursery vouchers (0–3 years)	First cycle of early childhood education	No specific monetary cap; subject to the overall 30% limit
Training	Role-related professional development	It is not treated as a benefit in kind if it is required for the performance of the job

Note: these figures are provided for guidance only and reflect the framework in force at the date of publication. The specific treatment depends on compliance with legal requirements and on the implementation model (who pays, whether the benefit is assigned to the employee by name, traceability, etc.), so this should always be validated when designing the plan. Full legal references are set out in the practical Personal Income Tax manual published by the Spanish Tax Agency.

Payroll, Personal Income Tax and social security contributions: what changes and what does not

A recurring question for HR departments is whether flexible compensation alters contribution bases or an employee’s future entitlements. As a general rule, the change affects the composition of remuneration and the tax treatment (Personal Income Tax) of certain items, provided the relevant conditions and thresholds are met. In all cases, the exact impact depends on how each benefit is implemented and how it is reflected in payroll, which is why it is advisable to establish clear operating rules and review them on a regular basis.

“Communication is part of the design. If employees do not understand how it appears on their payslip, the plan loses credibility, even if it is technically correct,” warns the RibéSalat specialist.

Real advantages for the company (beyond “tax savings”)

In a B2B environment, value lies not in the slogan but in the impact on three areas: competitiveness, retention and reward consistency.

Attraction and retention without distorting payroll costs

A well-governed plan can improve the perception of total compensation, particularly among employee groups where salary flexibility is limited. In tight labour markets, flexible compensation can support the employee value proposition if it is communicated transparently and without exaggerated claims. The Cobee 2026 report on reward trends states that 7 out of 10 employees consider the benefits package an important or decisive factor in staying with their employer, confirming that flexible compensation has become a key trend in the future of work.

Total reward and internal equity

From a management perspective, the key issue is equity: if the plan benefits only certain profiles, it can create friction. For this reason, the recommendation is to design the catalogue with broad-based usability in mind (such as meals and transport), while also allowing for personalisation (such as nursery vouchers or health insurance) in order to reflect different employee realities. This dimension becomes particularly relevant in light of the entry into force of Directive (EU) 2023/970 on pay transparency, scheduled for 7 June 2026.

“When we talk about compensation, we are not only talking about euros: we are talking about consistency. A plan that improves net pay but undermines internal equity ultimately erodes trust,” warns Alberto Diez de Celis.

A rigorous wellbeing culture (not empty “emotional salary” rhetoric)

Flexible compensation is not a substitute for culture or leadership, but it can support a measurable wellbeing strategy through take-up, satisfaction and usage by employee segment. What matters is integrating it into both compensation policy and the corporate narrative, without turning it into a marketing claim.

Risks and common mistakes

A poorly designed plan does not simply lose effectiveness: it can generate tax incidents, internal conflict and a negative employee experience that undermines trust across the organisation.

Design and communication errors

Launching it without employee education: employees do not understand either the “why” or the “how”, and perceive it as unnecessary complexity.
Promising universal savings: the impact is individual and should be presented as an optimisation tool subject to usage and statutory thresholds.
Failing to segment: not all benefits are equally relevant to all groups (for example, families with childcare needs or employees with commuting requirements).
Not reviewing the plan annually: statutory thresholds and exemptions change, and a static plan quickly becomes outdated.

Tax and operational risk, and the importance of traceability

Technical guidance in this field consistently emphasises the thresholds and conditions applicable to each product; risk emerges when a threshold is exceeded or the arrangement is implemented without adequate control. The Spanish Tax Agency practical manuals set out the scenarios in which exemptions may be lost and the consequences for the employee’s tax return where the requirements are not met.

“Flexible compensation does not fail because of the concept; it fails because of execution. Governance, traceability and annual review: that is the triangle,” concludes the RibéSalat specialist.

Flexible compensation is a mature and valuable tool for companies seeking to strengthen their employee value proposition without compromising cost sustainability. However, its real return emerges only when it is treated for what it truly is: a compensation policy with rules, governance and communication, not as an “extra” or a simple tax adjustment.

Alberto Diez de Celis is Director of People & Talent at RibéSalat, an insurance and reinsurance broker headquartered in Barcelona, founded in 1987 and a recognised player in the Spanish market after surpassing €1 billion in premiums brokered in 2024. His team advises Spanish companies on the design, governance and communication of flexible compensation schemes and total reward policies. He is the author of the article “The evolution of flexible compensation programmes during the pandemic”, published in the journal Observatorio de Recursos Humanos y Relaciones Laborales (ISSN 1886-4244, No. 162, 2020) and indexed in Dialnet.

Updated on 29/05/26

FAQs

Is flexible compensation the same as an employee benefit?

Flexible compensation and employee benefits are different concepts. An employee benefit is an additional cost borne by the company (on top), while flexible compensation means that the employee allocates part of their gross salary to specific products or services. The distinction matters because it affects cost, internal equity and how the policy should be communicated.

How much salary can be allocated to flexible compensation?

Employees may allocate up to 30% of their annual gross salary to flexible compensation, in accordance with Article 26.1 of the Spanish Workers’ Statute. In addition, the remaining cash salary must always comply with the applicable Spanish National Minimum Wage.

What happens if an employee exceeds the threshold for a benefit (for example, meals or transport)?

Each product has its own exemption threshold. If that threshold is exceeded, the excess amount is treated as ordinary remuneration and taxed accordingly for Personal Income Tax purposes. That is why it is essential for the plan to include controls, reporting and clear employee support in order to avoid annual payroll incidents.

Which items are most commonly included in a corporate plan?

The most common items are meal vouchers, public transport, nursery vouchers for children aged 0–3, private health insurance and training. These are the benefits most frequently used and those that benefit from specific tax treatment under Article 42 of the Spanish Personal Income Tax Law. The final choice depends on workforce profile and overall compensation strategy.

Does flexible compensation affect payroll and salary perception?

Yes. It changes the composition of salary, since part of remuneration is allocated to services or products. Employees may see a different net figure if the relevant item qualifies for exemption within the statutory thresholds. Internal communication should therefore be educational and include examples by employee segment in order to avoid confusion.

Is it suitable for SMEs, or only for large companies?

Flexible compensation is viable for both SMEs and large companies. The decision does not depend on company size, but on governance capability and workforce characteristics. In SMEs, it tends to work best with a short catalogue and clear communication; a small, well-executed plan will always outperform a larger one with weak control.

What are the most common implementation mistakes?

The most frequent mistakes are launching the programme without employee education, promising universal savings, failing to segment by employee group, and not defining governance or threshold controls. When this happens, the plan generates incidents and distrust, losing its primary purpose: strengthening total reward and the employee value proposition.

How do you design an effective flexible compensation plan?

An effective plan combines four elements: a catalogue tailored to the workforce profile, rigorous implementation to safeguard tax exemptions, educational communication with practical examples by employee group, and an annual review of statutory thresholds and usage results. The involvement of the People function and a specialist compensation adviser is critical.

Flexible Compensation in the Workplace: What It Is, How It Works and Why It Strengthens Your Reward Proposition Without Increasing Costs