Moving to a cost to company?

Moving to a cost to company?

Human Resources, Payroll / eTorQue

The ‘total cost to company’ basis of remuneration (otherwise known as CTC), while not a new concept, is gaining momentum in South Africa. Initially only bigger companies used this approach to remunerate employees, but it is now slowly becoming the most common method of remunerating employees. The question that is often asked is ‘why this approach, and what benefits does it create for both employer and employee?’

In my experience, companies invariably convert to this basis of remuneration to gain control of the costs of employment.

  1. In the past employers negotiated salaries with employees and only concentrated on the actual cash benefits payable to employees. Benefits such as medical aid and retirement fund contributions were not considered. If you analyse the cost of these benefits, you will notice that they make up a significant portion of employees’ total cost of employment. Benefits therefore must be considered on an equal footing with the cash salary paid to employees. The ‘total cost of employment’ concept is therefore the logical answer to this remuneration issue.
  2. Legislative changes can result in increased costs for employers. However, these changes are seldom accompanied by a decrease in the increases expected by employees annually. A cost to company approach allows employers to better manage overall employment cost increases.

So, how does one determine what an employee’s total cost of employment is? The answer is simple – add the employee’s cash salary (basic pay plus allowances) to the company’s contributions and the employee’s benefit funds.

Let’s look at an example:

Employee A receives a monthly basic salary of R 15 000 and a travel allowance of R 5 000. The company contributes 7% of the employee’s basic salary to a provident fund and R 1 000 per month to a medical aid. The employee’s total cost to company is therefore:

Basic pay: R 15 000
Travel allowance: R 5 000
Provident fund: R 1 050 (R 15 000 x 7%)
Medical aid: R 1 000
Total cost to company: R 22 050

Using this approach, employers will always know what an employee is costing them. The advantage to the employer is that they now have a base on which to work from when allocating employees annual increases and bonuses.

Employees on the other hand often fail to see the fact that benefits paid by employers are also salary costs. They are also suspicious of changes to their pay structures, thinking that their employer is trying to ‘rob them’. It is important that these concerns are addressed before there is unnecessary industrial action. For the more informed employees though, the CTC approach offers flexibility when negotiating salary increases. The employee can choose the salary components that best suit their immediate needs. Salary increases can be channeled, subject to the company’s policies, into components that they choose. This flexibility has however been significantly reduced by the amendment of employee tax legislation over the past few years.

As an incentive to look at the possible conversion to a CTC approach, it may be a good idea to look at a topical example which many employers are currently faced with – the high annual medical aid premium increases.

Employers who have traditionally paid contributions on behalf of employees have been hit hard by these cost increases. In many cases employers have had to absorb at least a 10 to 12% increase in medical aid premiums as well as granting employees’ inflation linked annual increases. The only way of controlling these costs is to use the CTC approach to remuneration. At the time of granting annual increases the employer agrees a total cost to company figure with their employees. When medical aid increases are announced the employee would be faced with a problem. As the CTC cannot change the employee would have to take a cut in cash salary to absorb the medical aid increase. This forces most employees to take a good hard look at their medical aid requirements. Many employees have downgraded their medical aid schemes to better suit their needs while at the same time maintaining an adequate cash salary. There is still however a belief that some companies have adopted the CTC approach in order to pull the wool over employees’ eyes and have changed conditions of service without adequately explaining the total cost concept to employees. It is for this reason that any CTC implementation must include extensive consultation between employer and employee.

There is no doubt that the use of the CTC concept is gaining momentum. This fact is clear if you page through the employment section of your local newspaper. Employers want to know what employees are costing them and seek solace in comparing the salaries that they pay with those reflected in newspapers. The concept is here to stay, and I believe that more employers will begin to use this method of remuneration to gain consistency in terms of pay structures in the marketplace. Expect to see employers playing open cards with their employees before implementing the CTC concept as a remuneration practice. The economy is in a bad place and jobs are hard to get, and employers will keep a tight rein on costs by using the CTC process of remunerating employees. It is therefore important that the correct process is followed, and an experienced legislative compliance specialist is used. If you need help navigating this process, please do not hesitate to contact myself on [email protected].