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Employment packages – trends & realities

Employment packages – trends & realities

By Hennie Gildenhuys who can be contacted at info@21century.co.za ; www.21century.co.za

1. Introduction

It is interesting how many Employers have the wrong perception about Total Packages. Some even believe that Total Packages are "dead" following the recent changes in the South African Taxation Legislation. This can only be true if individuals are under the impression that Employers move to Total Packages for tax purposes.

For the informed the purpose is to align remuneration with best practice, giving the Employee more flexibility. Total Packages also serves to attract individuals to the organisation and to retain a skilled workforce in a labour competitive environment. It further benefits Employees without necessarily increasing employment costs.


2. Definitions

All-inclusive Packages (fixed cost of employment) are often confused with total cost of employment. The following build-up illustrates the concepts:

Basic Salary:

+ Allowances (Travelling / Entertainment / Subsistence / PC / Telephone)

+ Guaranteed annual bonuses (13th cheque)

+ Benefits (Company Car / Housing)

= Basic Package

+ Employer Contributions (Medical / Retirement / Group Life)

= All-inclusive Package (Fixed Cost of Employment)

+ Inconvenience Pay (Overtime / Standby / Shift)

+ Variable Income (Performance Incentives)

+ Employer Contributions (Statutory)

= Total Cost of Employment

Statutory contributions (i.e. UIF, Skills Development, RSC and COIDA) remain the responsibility of the Employer and are payable in addition to All-inclusive Packages.

3. Advantages

Many South African organisations have moved to All-inclusive Packages in line with International best practices’ remuneration trends. A recent survey conducted by 21st Century Business and Pay Solutions listed the key reasons and/or advantages in order of importance as:

>> Employer

+ Fixed and known guaranteed employment costs - no hidden extras;

+ Better positioned to attract and retain high quality staff;

+ More equitable and defendable approach to remuneration;

+ Simplified and accurate market comparisons and bench-marking; and

+ True worth known to and understood by Employees.

>> Employee

+ Greater flexibility within a Total Package structure; and

+ Better positioned to structure packages in accordance with own needs.

4. Conversion issues and costs

Converting to total packages is similar to moving off the rugby field onto the soccer field. It’s still a ball game played by a team but it’s a very different game. The new cannot be played according to the rules of the old: you may not touch the ball – it will not work. Moving to total guaranteed packages means a total change in game. One cannot change the game without embracing and playing the new rules.

Many employers do not understand the differences between an add-on and an all-inclusive remuneration structure. The former is an input driven reward system while the latter is based on outputs and value-add.

Add-on means starting with a base (salary) and add on those allowances and benefits that you qualify for (inputs – you have to own a house or be a member of the medical scheme to qualify for additional benefits, irrespective of your outputs). All-inclusive means that your rewards are based on the value added as measured in the labour market, irrespective of medical aid membership or home ownership.

One of the fundamental principles of total packages is that it should be fair and equitable regardless of home ownership, medical aid membership or any other basis of discrimination. When employers are faced with these realities the impact of equity costs start to surface. Total package is an output-driven reward structure that results in the same reward for the same outputs or value added to the employer.

Typical areas where inequities occur include car allowances, medical aid membership and housing benefits. The increase in employment cost from correcting these can be as high as 5%, depending on the extent and nature of the existing inequities. Not to convert to total packages will neither prevent the increasing demands to correct these inequities nor will it be able to avoid the resulting increase in costs.

5. Employee needs

Based on 21st Century’s research in a number of organisations, Employees’ needs are different and require Employers to review their Remuneration Strategies and Policies. The key needs that all the individuals had echoed are (in order of importance):

+ Internal equity;

+ External market competitiveness;

+ Flexibility;

+ Transparency

+ Simplicity.

6. Structuring of packages

Structuring of Packages means that Employees are allowed to choose the package components that suit their lifestyles from time to time. Although the same options are available to all, the relevance of any item should be used as basis for selection.

The debate on company cars versus travelling allowances continues. Many uninformed individuals express opinions that unfairly promote the one or the other. Bottom line is that the benefits derived from either option are linked to the costs and usage of the vehicle. In our opinion, based on extensive experience in this field, a conclusion can only be drawn once an accurate and comprehensive comparison between the two has been made.

The components making up the All-inclusive Package are subjected to tax in accordance with South African tax legislation. Any changes involving additional taxes are not the responsibility of the Employer.

7. Conclusion

Employers have come a long way to ensure that remuneration is fair and equitable. The conversion from basic salary plus allowances and benefits to All-inclusive Packages is often the last bridge to cross before internal equity and external market competitiveness can be tested with confidence.

It is the conversion that imposes risks and costs. No Employer needs to experience any uncertainties and disruption during or after the conversion. A thorough investigation into the impact prior to implementation will reveal all risks and costs. Informed decisions based on well-motivated recommendations will help prevent any negative consequences.

The Total Package concept is exciting and empowers individuals to structure competitive packages. Those Employers who approach the design and development thereof with care reap far more than just its benefits.

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Gary Watkins

Gary Watkins

Managing Director


C: +27 (0)82 416 7712

T: +27 (0)10 035 4185 (Office)

F: +27 (0)86 689 7862

Website: www.workinfo.com
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