“There’s only one remuneration model employers should be considering during COVID-19,” says Tanya Tosen, Tax and Remuneration Specialist at Tax Consulting South Africa.
What a company is prepared to pay its workers has always been a juggling act between three main considerations. These are: attracting, retaining and motivating talented employees; being fair; and keeping total remuneration costs from spiralling.
According to Tosen, there is, in fact, a structure that offers a critical balance between all these needs.
There are two main remuneration models that employers use throughout South Africa with a third being a hybrid of the second model.
The first is Basic Plus which, as the name suggests, starts with the basic salary and adds benefit contributions to determine the total cost of the employee.
The second is Cost to Company. This begins with the total cost the employer is willing to pay and reduces that amount by benefit contributions to arrive at the employee’s net income.
The third is Cost to Company with Flexible Benefits. This model is similar to Cost to Company in that the total cost is fixed. However, it allows employees to adjust their contributions to individual benefits, with any remainder flowing back into their basic salary.
Pros and cons
Although Basic Plus is still used, it has a major flaw in that an employee’s total remuneration cost is not capped and therefore unpredictably variable.
Consequently, this makes it difficult to pin down what the company’s overall staff expenditure is at any point in time. For example, if benefit rates unexpectedly increase, the total cost of all employees increases too, with the employer bearing the brunt. Similarly, projecting future staffing costs is uncertain at best.
On the other side of the coin is Cost to Company. Because the total cost of every employee is capped, it becomes easy to report on remuneration costs and project staffing budgets.
However, in this model, benefits are generally rigid and an unexpected increase in rates negatively impacts the worker’s take home pay. This calls into question its motivational efficacy and fairness to staff.
The Cost to Company with Flexible Benefits model offers the best of both worlds and, in a COVID-19 stricken economy, is just what the doctor ordered.
The employer still retains the certainty of a fixed total cost to company, and can just as easily report on and project its company wide staffing costs.
At the same time, employees can manage their own contributions. This means they are not paying for benefits they don’t need in their current phase of life and can take advantage of those they do. Any remainder becomes part of their take home pay.
“This is especially important to those who are facing salary cuts right now and wish to free up cash to meet their financial obligations,” says Tosen.
Its balance between motivation, fairness and control clearly makes Cost to Company with Flexible Benefits the winning model during and after the pandemic.
Tosen says that, in the COVID-19 era, more companies are moving to a Cost to Company with Flexible Benefits remuneration model.
She strongly advises employers to consider switching and to seek the assistance of a reputable remuneration consultant to ensure a smooth transition.
“Those who adopt it will enjoy the same benefits as the legacy Cost to Company structure while offering the flexibility and assurance employees need at this time to remain productive,” she concludes.