Business & Economy

Monday, 23 November 2015 14:22

Performance and Reward

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Approaches to Fixed Pay

Evaluating fixed pay packages in South Africa across the banking industry is not without its nuances and can in some cases be a differentiator between one firm and the next.

According to Tyrone Jansen from McLagan, Aon Hewitt, the most prevalent approach and one that is common amongst local South African firms is the concept of Cost to Company (CTC). “An employee is offered a total fixed amount of pay which is the maximum a firm will pay each year on a fixed basis, from which they get to choose their respective benefits from. These benefits typically encompass private medical aid, pension/provident fund and death and disability benefits.  The take home salary is the net number after these benefits have been removed.”

The other approach, one common internationally and with some firms on the ground in South Africa, can be classified as a ‘Basic Earnings’ Plus Benefits (BEPB) package. “In this approach the employee is given a guaranteed salary number each month and then benefits are added on top of that. These benefits are subsidised by the employer and can vary depending on medical scheme, size of family, pension contributions and grade / level / seniority of employee. An example is a larger subsidy that is provided for bigger families in some instances for medical aid and the like,” explains Jansen.

The most notable difference is that an employee’s take home pay is guaranteed and fixed with a BEPB package, whereas CTC allows the flexibility to choose from a total number what to spend on benefits with the left-over amount as take home pay.

Advantages and disadvantages to either approach

In the long term, CTC is more cost efficient to a company, especially as insurance benefit items such as medical aid, death & disability and the like tend to increase in cost at a faster rate than inflation and general pay increases.  It furthermore allows a firm to budget and control its payroll costs much more effectively, without the hindrance of benefits costs spiralling upward, meaning that the cost is borne by the employee.

“For an employee the advantage is that you do get flexibility in terms of how big you want your benefit spend to be. Even though these benefits are compulsory in some instances, you can take out the minimum or maximum amount depending on your circumstances. For a single professional with a small or non-existent family, this option can be attractive as you can structure the benefits to suit your needs,” says Jansen.

“The disadvantages are that from a take home salary perspective, your pay may decrease or remain flat even if your total cost to company package goes up year on year,” he adds. “This can happen if there is an above inflationary increase in benefits costs, especially medical aid, which then eats into any potential increase an employee may receive. This is even more punitive as you get older and your circumstances, preferences change around the type of medical cover and pension contributions you want to make,” Jansen explains.

“The advantage of the guaranteed BEPB package is that your salary is effectively ring-fenced and the benefits are added on and paid for on top of your salary, often subsidised at 100% for medical aid.  For an individual with a larger family where the cost of these benefits becomes bigger and bigger, this can be of great benefit, especially where insurance items are increasing at a much higher inflation rate than the Consumer Price Index (CPI),” Jansen illustrates.

Trends in South Africa

In South Africa, it is the international firms that tend to adopt the BEPB approach, with local firms aligning more with the CTC method of pay delivery.  “It is worth noting that the benefits that a fixed pay package may provide for the international firms from a competitive pay standpoint can be eroded by the preferential mortgage rates that local banks provide their employees, something that is often overlooked or not valued enough when communicating an individual’s entire remuneration package,” Jansen advises.

In order to effectively compare a person’s fixed package it is imperative to collect all elements of benefits especially for those firms still operating a BEPB remuneration model.

“In theory the two approaches to compensation should be net neutral to an employee in the same role with same preferences, all things being equal.  This is seldom, if ever the case. Whilst it may be so at inception, in the long term, the longer a person is on CTC at the same role and same level, the more divergent the take home pay will be from a guaranteed take home pay perspective,” says Jansen.

As firms continue to manage costs and budget more effectively, one can expect there to be an ever increasing shift towards the cost to company pay approach in South Africa.

“The above overview does not take into consideration the variable or bonus component to compensation. This is historically a prevalent part to an employee's overall remuneration in the financial services industry and firms should always manage, benchmark and review packages on a total remuneration perspective,” he says.

“However, as more stringent regulations, scrutiny and poor performance hinder the banking industry, we are expecting an increased focus on fixed pay and how best to remunerate and attract the right people. In many instances the bonus element has reduced or become non-existent for some pay-grades and functions, which is leading talent to move to employers that offer attractive fixed pay packages and associated benefits,” Jansen concludes.

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