Growing U.K. Compensation Culture Poses Major Threat to Profitability, Jobs, Survey Reveals

August 1, 2004

U.K. businesses are being increasingly hampered by the costs of dealing with the burgeoning compensation culture, which in turn is diverting management resources and financial investment away from core business and revenue generating activities, according to findings from a survey conducted by Aon.

The survey, which studied the compensation culture of U.K. companies and organizations, found that 75 percent of surveyed companies see the current growing trend as creating an unsustainable burden for industry, commerce and public services.

Recent arguments have cast doubt on the genuine existence of a compensation culture in the UK. A report published in May by the government’s Better Regulation Taskforce argued that the evidence does not suggest an out of control, U.S.-style compensation culture, however these new findings suggest otherwise with 62 percent of companies surveyed seeing an overall increase in the cost of claims to their business.

Additionally, of those surveyed:

* Ninety-six percent do not think the government is doing enough to tackle this issue;
* Sixty percent feel the fear of the compensation culture is hampering their business by distracting management time;
* Forty-nine percent said it diverts financial resources, and;
* Forty-six percent said it creates too much red tape.

Max Taylor, deputy chairman at Aon Limited, said: “Whatever the debate around the existence or not of the compensation claims culture in the U.K., and our survey shows 62 percent have seen an overall increase in the cost of claims over the last five years, the hard evidence here is that U.K. businesses are picking up a significant cost in terms of managing increased insurance and regulatory costs.

“Of major concern for the future of the U.K. plc is the diversion of management and financial resources as companies struggle to cope with this problem, which will have an inevitable knock-on effect on profitability and ultimately employment levels,” Taylor added.

Some respondents also commented that the claims culture would hasten the growing trend for offshoring business activities away from the U.K. as companies seek to minimize their risks and the chances of being sued.

The top three reasons for the growth of the compensation culture were seen as:

* the growth of ‘no win no fee’ legal services;
* media advertising of these services;
* the reluctance of insurers to defend claims.

“Many of the respondents felt claims numbers were being fuelled by the reluctance of insurers to defend claims because the cost of settling out of court is cheaper. One possible consequence of this might be an increase in the total number of fraudulent or spurious claims that ordinarily would not stand up in court,” Taylor said.

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