Our Package Structuring Tools provide companies with a streamlined approach to the conversion process. In addition we also provide companies with travel calculators that simplify and maintain compliance with the necessary tax requirements.

Implementation Principles

These principles are of critical importance for successful implementation and will normally be approved at Board Level. Our approach is also different here from other providers and the same deliverables will not be found under their methodologies. These principles are –

  • Cost neutrality for the business. The cost to employer (or employee cost to company) must be exactly neutral before vs. after the implementation. We will build a testing calculator to evidence this and which is also a critical part of the rollout process.
  • No employee is worse-off. There must be sufficient flexibility and correct design of employee benefits, as this remuneration methodology necessarily means that there are changes to the level of take-home pay or benefit entitlement. Where correctly designed, both on take-home pay or benefits, the employee will not be worse off. It is critical to have correct benefit design hereon, to ensure that employees make remuneration choices which are aligned to their personal financial requirements. This is especially complex where you need to harmonise different historical approaches, but we are deeply experienced in delivering hereon.
  • Clear business case. The business case will normally be employee cost control, treating employees fairly, moving towards better internal and external equity, attraction, retention and best possible return on investment on the employer’s remuneration spend.

Testing Calculator

We normally start our engagement building a Testing Calculator and with all your specific employee information. Whilst the concept of CTC (also referred to as TGP) appears simplistic, all employers have their unique historical items and how these items are practically dealt with, exactly how the CTC approach will operate in your environment and how the rollout process will be managed, is seldom approved at a conceptual level. The business wants to see real data and computations, to understand how the risk in changing employment conditions and remuneration structures will be seamlessly managed. To enable this, the testing calculator is critical. On all our clients, a Testing Calculator has always resulted in actual implementation.

We note below the normal components of the testing model, which then also forms the basis for the Package Structuring Tool (PST) that will be used for conversion and future employee decision making –

  • Current Remuneration. Employees are provided with a detailed “current” total guaranteed package statement, including current earnings and benefits breakdown, per employee on an individual basis and that can be segmented. The employer benefits include the traditional retirement funding benefits, medical aid selections, but also additional employer specific benefits. The employee is thus fully aware of the total current value proposition and the employer has noted all employment costs.
  • Selection Page. This allows selections to be made of the various flexible options allowed by employers. This will also show previous levels of remuneration, to allow an apples-with-apples comparison.
  • Travel Allowance Model. We have a specific employee travel allowance model which allows for the computation of a tax break-even travel allowance to employees. This serves the purpose of not paying an employee an excessive travel allowance (which also creates an employees’ tax exposure for the employer), with the result that there should be no pay-in or otherwise surprises for the employee on end of the year personal tax assessment. The model also allows employer and employee decision making on employee reimbursements, the tax consequences thereon, as well as optimal planning from a personal and business perspective.
  • Dummy payslip. This provides the payroll, remuneration, general human resources and other stakeholders, with an easy-to-use model for making offers, computation of take-home, disclosure of employee benefit costs (to the employer) and the actual benefits (for example, the actual amount of life cover, risk cover and core retirement funding) to the employee.
  • Employees’ tax computation. This provides a detailed line-by-line employees’ tax computational breakdown, which allows immediate internal and external audit on the accuracy of the computation. The employee can also self-check and compute the employees’ tax position. Thus, there is not only transparency, but this would be necessary for purposes where an employee requires personal financial planning and provisional tax filing information, depending on the sophistication of the financial position of the employee.
  • Allocation Schedule/Employee Agreement. This would contain the employee sign-off on specific remuneration selections made. Where the business is not on a flexible remuneration offering, the sign-off becomes less critical. However, it would still be good practice, from an internal audit perspective as well as South African Revenue Service audit perspective, to an employee confirmation on items such as travel allowance, medical aid selections and other personal particular confirmations, specific to your business.
  • Comparison Sheet. This gives an employee a line-by-line, apples-with-apples, comparison of old (“basic plus”) vs. new remuneration (CTC), based on the selections made.

The additional purposes of the testing calculator may be summarised as follows:

  • Determine the true Total Guaranteed Package of employees. There will be components such as allowances, 13th cheques etc. which will require decision making on whether they should be included or not into CTC.
  • Have a complete working model to show the Board, make informed decision making on benefit flexibility, show rollout protocol as well as to show how the Total Guaranteed Package methodology will be correctly managed into the future.
  • Perform a detailed check of all employees’ tax computations on payroll and to identify any anomalies.

After approval of the testing calculator and flexible parameters, the planning can commence for the rollout.

As part of this exercise we further provide assistance on ancillary matters, including:

  • We will provide assistance with the negotiation and agreement of flexible benefit funds with employee benefit brokers.
  • We draft and communicate employee notices, new contractual clauses for new contracts, addendum for old agreement and other documents explaining the CTC rollout methodology
  • We facilitate group presentations and also meet with senior management for the actual CTC rollout exercise.
  • Assistance with miscellaneous issues, such as notional salary for incentive computations, setting-up of payroll parameters and dealing with miscellaneous matters.

Employee Travel

Accompanied with the CTC conversion exercise we can provide employee travel best practice guidance. This will include the following –

  • Travel allowances for normal employees and within the parameters of the Income Tax Act;
  • Company vehicles for tool of trade employees, including private usage costing and limitation, new rules to align with best practices and using the new tax fringe benefit rules; and
  • Dealing with historical cases on open-ended costs and usage, to ensure a cost controlled best practice for the future.

Read more on the benefits of converting to a Cost-to-Company package structure

WHY COST-TO-COMPANY (CTC) WITH FLEXIBLE BENEFITS?

Total cost-to-company (often also referred to as total guaranteed package (TGP)) has become a prevalent remuneration structure approach in the South African market. The conversion to a cost-to-company approach will however only provide optimum value where flexible benefits are included in the approach. Where flexible benefits are offered, employees enjoy maximum flexibility in the CTC approach allowing own package structuring based on personal financial and lifestyle choices. Following a CTC remuneration approach is usually based on the company’s remuneration philosophy, forms part of the remuneration strategy and is underpinned by the Human Resources and the overall company strategy.

The business case for moving towards a CTC approach with flexible benefits may be summarised by highlighting the following:

  • Employment costs are better controlled, simplified and managed
    All guaranteed remuneration elements (cash and benefits) are included in the cost-to-company package and therefore all guaranteed employment costs are fixed and known with no hidden extras. The employer is therefore better able to manage the remuneration costs in a simplified manner.
  • Optimal remuneration of employees within budgetary constraints
    The employer is better positioned to attract and retain high quality staff within budgetary limitations and allows for cost saving when employee offers are made during the recruitment process. Therefore, CTC allows a more structured and streamlined approach to remuneration and is the first, critical step, towards a Total Reward Model.
  • No wasted spend on unnecessary employee benefits
    Where flexible benefits form part of the CTC offering, it provides a structure where employees are able to make personal selections to align remuneration to personal financial requirements that suit their personal life stage. Employees are therefore not provided with benefits that do not suit their particular life stage or personal financial requirements and therefore the employer is not spending on unnecessary or unwanted benefits. Thus, the employee remuneration mix is personal to the employee and a remuneration environment is created where “every cent counts” and where the employee is empowered with making their own personal decisions based on personal preferences.
  • Continued social responsibility through minimum benefit provision
    Providing employees a remuneration approach with maximum flexibility on benefits does not mean employees may opt out of participation of critical items. The employer ensures social responsibility by setting certain minimum benefits that the employee is obliged to participate in.
  • King III and good governance
    The CTC remuneration approach is fully compliant with King III on employee remuneration and good governance principles.
  • Retirement Fund reform
    Aligns with new pension fund reform rules, which has commenced already on employee insurances and expected to be fully operational on 01 March 2015, when employer contributions to pension and provident funds become fully taxable and employee gets corresponding tax deduction up to 27.5%.
  • Leading South African remuneration practice
    Aligns with 75% of prominent South African employers, for employees at levels where attraction and retention are business critical.
  • Ease of administration
    The majority of the South African employers has transitioned to a CTC approach (at least at certain levels within the organisation) providing a very high level of comfort that most (if not all) the payroll systems used in South Africa can accommodate a CTC remuneration approach.
  • Fully tax compliant and tax optimal
    In the event of a tax audit both the employee (taxpayer) and the employer have peace of mind that all taxable elements of remuneration have been accurately taxed and recorded, resulting in no unforeseen surprises.
  • Accurate market benchmarking
    The CTC approach enables simplified and accurate market comparisons and benchmarking. The TGP, a term commonly used by salary survey providers, provides an all-encompassing guaranteed package which includes guaranteed cash and the value of guaranteed benefits. This will include all cash allowances received on a regular basis as well as non-cash benefits such as group life assurance, funeral benefit schemes, medical aid schemes etc. The CTC (or TGP) is an accurate benchmark as it provides a common value across organisations and industries against which to benchmark, as appose to the basic cash component which will fluctuate in a CTC environment due to employee personal selections.
  • Internal equity achievement
    Where a CTC approach is followed the employer is better equipped to ensure internal equity around guaranteed remuneration. Effective January 2014, there has been a number of significant amendments to the Employment Equity Amendment Act (EEA) 55 of 1998, with the promulgation of the Employment Equity Amendment Act, 2013. The amendment to Section 6 of the EEA of 1998 now includes a sub section 4, stipulating the principle of “equal pay for work of equal value”. The purpose of the amendments to the Act is to ensure that there is no unfair discrimination in employment terms and conditions which includes remuneration. Where a CTC approach is applied, internal equity measurement of all the guaranteed remuneration elements and the future management and legal reporting thereof becomes a streamlined and straightforward process. Furthermore, the approach enables the harmonisation between employee remuneration, ensuring compliance to the Act.

The CTC approach not only gains the employer, but the advantages of CTC similarly extends to the employees:

  • Greater flexibility
    Within the CTC structure the employee has greater flexibility. The employee can easily structure their remuneration package according to personal financial planning needs that are aligned to and suit their personal life stage. The employee may select a mixture of more cash or more benefits which suits the employee’s personal profile but within legal parameters and meeting the employer’s set minimum benefits and good governance requirements. Furthermore, the employee is not forced to participate in benefits that they may not value or require, giving them authority over their own remuneration structuring choices contributing to the retention of employees.
  • Employee value proposition
    CTC provides employees the complete picture of guaranteed remuneration (cash and benefits) so that they know and understand their true worth, enabling a better appreciation of the employee value proposition.