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.