Which pay package would you prefer?

According to Tyrone Jansen from McLagan, Aon Hewitt, the most prevalent remuneration approach among 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. 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, which is more common internationally, 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,” explains Jansen. “These benefits are subsidised by the employer and can vary depending on medical scheme, size of family, pension contributions and grade / level / seniority of an employee.”

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 of 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 and death and disability) tend to increase, in cost, at a faster rate than inflation and general pay increases. It also allows a firm to budget and control its payroll costs 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,” says Jansen. “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.”

He adds that the disadvantages are that an employee’s take-home pay may decrease, or remain flat, even if the total cost to company package goes up year on year. “This can happen if there is an above-inflation increase in benefits costs, especially for 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, and preferences, change around the type of medical cover and pension contributions you want to make,” Jansen says.

“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 percent (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).”