The Increasing Need for Flexible Benefits

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.

Increase of the Scale of Benefits

Increase of the Scale of Benefits

The Unemployment Insurance Amendment Act, No. 10 of 2016 (“the Act”), is aimed at having a positive effect on the country’s labour force. Furthermore, there are likely to be positive effects on the economy as well.

The Act will see those who lose their jobs receive money for a longer period when they apply for unemployment benefits. The UIF benefits have been increased from 238 days to 365 days. A further change here is that employees will be able to apply for benefits over twelve (12) months as opposed to six (6) months as was the situation prior to the amendment.

Some further amendments relate to maternity leave. Expectant mothers were not able to claim maternity benefits because they could not claim until the child was born. This meant that only once the child was born, the benefits could be claimed for and were received upon the mother returning to work. Expectant mothers may now claim eight weeks before estimated due date, which should grant the benefits to the mother when necessary and not post-fact. The maternity benefit has also been increased from 45% of normal pay to 66%.

On 17 March 2017, the Minister of Labour, Mildred Nelisiwe Oliphant amended the Unemployment Insurance Fund scale of benefits contained within Government Gazette notice No. 588. The value of the benefit pay-out by the Fund has been amended. The changes in the amounts are an increase in the per annum rates, from R 178 464 to R 212 539 and an increase in the monthly amount to R 17 712 and an increased weekly amount of R 4 087.

The UIF thresholds were last adjusted in 2012. As a result of the new threshold values that will come into effect on 01 April 2017, these contributions will now increase to up to R 177.12 per month for employees who earn above the previous threshold value of R 14 872 and were capped at a maximum contribution of R147.82.

These changes will take effect from 01 April 2017.

Herewith a link to the Government Gazette notice:

Anglo Clips Executive Wings

The undertaking falls short of shareholders’ demands, but marks an effort to ensure executives do not score big for developments beyond their control.

Anglo American has delivered on its promise and pared back the scope for mining executives to be excessively rewarded as a consequence of surging commodity prices and favourable exchange-rate movements.

The undertaking to limit rewards was not as much as some shareholders demanded at the 2016 annual general meeting, but it marked an effort to ensure that executives do not score big remuneration payouts for developments beyond their control. In particular, it should help ensure that executives do not pocket hefty bonuses in times of negative returns.

The mining group’s remuneration committee is also trying to limit the profit accruing to executives when they are awarded large tranches of shares during a slump in the share price.

After the shareholder revolt in 2016, when a record 41% of shareholders voted against the remuneration policy, CEO Mark Cutifani promised to heed their concerns.

In 2015, Cutifani was paid £3.4m, which seemed reasonable, but his package included an eye-popping 1-million shares. These were awarded to Cutifani in terms of the company’s long-term incentive plan, which allowed for the awarding of shares valued at up to 350% of his basic salary.

In 2015, Anglo’s share price fell a whopping 75%, which meant Cutifani was automatically in line for a huge share award. During the year, the share price plummeted from just more than £12 in January to just more than £2 by year-end. Those shares are now back at close to £12 thanks to a recovery in commodity prices.

The chairman of the remuneration committee, Philip Hampton, said the committee was determined to tackle concerns about windfall gains for executives caused by share price volatility and the mining industry generally.

To do this, the new policy divides the measurement of earnings per share — half to be measured on actual earnings and the other half to exclude commodity prices and exchange rate fluctuations.

“The committee considers that this change will help smooth volatility and result in outcomes which provide a better balance between items within management’s control and those outside it,” said Hampton.

Other changes are aimed at limiting the benefits from spikes and troughs in the share price. Long-term incentive awards will be more closely aligned to total shareholder returns, with the maximum award for the CEO being reduced to 300% from 350%.

The proposed new policy will cap the value that can be received from shares awarded in the past as well as the future.

Executives will receive none of the shares awarded in 2014 because the three-year targets for total shareholder return and return on capital employed were not met.

According to Reuters, Luke Hildyard, an executive at one of the UK’s largest pension fund associations, the Pensions and Lifetime Savings Association, said that while Anglo’s direction was to be welcomed, an annual bonus potentially worth 300% of a salary on top of fixed pay approaching £2m still seemed “far too generous”.

Anglo’s proposals may have been influenced by the association’s plans to encourage its members to take a tougher line in re-electing remuneration committees.

Anglo is just one of many London-listed companies to have experienced shareholder revolts in 2016. Others included BP, Smith & Nephew, Shire and Babcock.

But despite the protests, shareholder action has so far proved to be largely ineffectual. The British government is working on proposals to reform executive pay.

As published by Business Day
Author – Ann Crotty