The Increasing Need for Flexible Benefits
Today’s South African organisation finds itself entrenched in difficult and uncertain market conditions resorting to cost saving solutions such as retrenchment, down-scaling and redundancy. Consequently, this has a notable ripple effect on attraction and retention strategy.
Ensuring the right talent remain with the organisation, in an environment where every Rand counts, has now become increasingly difficult, yet, critical to sustainability. Introducing flexibility to the remuneration package is an effective means of enhancing the employee value proposition and strengthening employee retention, without increasing salary costs.
Payroll professionals, by the nature of their function, have a good sense of what other organisations in the industry are doing in terms of effectively structuring the delivery of remuneration to their employees. Their understanding of competitive package structuring practices in the market ideally positions them to provide guidance to Human Resources in this regard.
The concept of incorporating flexible benefits within the remuneration structure is becoming widely recognised. It is a typical feature of the Cost-to-Company (CTC) structure. CTC structures, with flexible benefits, offer employees an opportunity to structure the benefits portion of their package to suit their current financial and personal needs.
The CTC with flexible benefits approach provides employees with the following advantages –
- It enables employees the opportunity to make informed choices by tailoring parts of the remuneration package to fit with their personal and financial circumstances;
- The employee is not forced to participate in benefits that they may not value or require;
- The employee will not be worse off as their package remains the same and the employee can elect benefits is such a way that they still maintain their desired net take home pay; and
- It aligns with retirement reform rules on where employer contributions to pension and provident funds will become fully taxable and employee will receive a corresponding tax deduction up to 27.5% Or a maximum of R 350 000 per annum, which ever applies first.
The advantages of this approach also extends to the employer as follows –
- There are no hidden costs which allow better budgetary control and management of remuneration costs;
- It enables employers to be better positioned to attract and retain quality personnel through effective delivery of remuneration;
- The structure is tax-compliant, resulting in no unforeseen liabilities in the event of a tax audit; and
- The approach allows for the harmonisation between employee remuneration, ensuring compliance to Section 6(4) of the amended Employment Equity Act (EEA) 55 of 1998.
The key considerations regarding the introduction of flexibility as part of the remuneration package are outlined below.
- Exclusively costed arrangement – An arrangement where the cost of risk benefits and administration fees are separated from the retirement funding portion of the contribution towards the retirement fund and allows the employee to structure the contribution in a manner which ensures that the retirement savings portion is optimised.
- Fund Salary (Pensionable Emolument) – flexibility in fund salary will allow the employee an option to either increase or decrease the base upon which retirement funding and risk benefits contributions are calculated. In this way employees can either maximise retirement and risk benefits or increase their net pay through a lower contribution.
- Multiples of Risk – where flexibility of risk benefits are provided in terms of a range of multiples of fund salary, employees can flex the benefit up or down depending on specific needs and life stage. Again, this will allow for either maximising the benefit or increasing net take home pay by choosing a lower multiple of risk cover.
- Medical Aid – by allowing the flexibility of choosing between a selection of plans on offer within the medical aid scheme, the employee can choose a plan that balances their medical cover needs with contribution rates.
Implementing flexible benefits within the remuneration structure will not only serve to help employees understand the full value of their remuneration package, but promotes fair and equitable pay practices. Where flexible benefits are aligned with the TGP approach, employees can enjoy maximum flexibility. Furthermore, employees can exercise personal choices on how their remuneration package is optimally delivered, thereby contributing to the attraction and retention of employees.