What is a ‘Total Cost Package’?
A total cost package is a method used by an employer to remunerate an employee based on a package, being the guaranteed sum of money the employer will spend on that position. The guaranteed sum is allocated by the employee to earnings, benefits, allowances and company contributions subject to various regulations.
Building a Case
Remuneration is a sensitive issue at the best of times and a massive case is required for pursuing the total cost route. It takes months of work by HR personnel, usually aided by enthusiastic consultants, software vendors and internal supporters. The decision to launch a total cost package is a complex one involving numerous issues. I have identified six popular drivers affecting this decision.
Each of these drivers warrant consideration in the context of the rapidly evolving work environment.
1. Organisational Values
Proponents of total cost packages emphasis the alignment to organisational values and culture. An organisation that professes, “People are our most important asset” and remunerates them on a total cost package is leaving little doubt about their status as another overhead item. Dressing up the cost mindset as a ‘flexible benefits package’ or ‘cafeteria package’ will rarely fool employees. The method used to remunerate employees should not reinforce the common detachment between organisational values and employee experiences
2. Attract Talent
While total cost packages, were a runaway success in the 1990s and lured talent, today it is no longer the same. Total cost packages have moved from a cutting edge innovation to a conventional basis of remunerating employees. Sometimes a total cost package is the first disappointment the employee experiences after signing the employment contract. The employee discovers the lethal variations between organisations. Starting a new job, feeling short changed is rarely good for the organisation or employee. Other job seekers are wary of total cost packages and place greater value on take home pay comparisons (even though it has shortcomings) in deciding whether to change jobs.
3. Cost Control
A firm favourite with management and bean counters are the cost containment benefits of total cost packages. In particular, the organisation seems protected from medical aid escalations – the employee funds it by reducing their cash component. There are three observations in this regard. First, cost containment can be addressed by modifying the existing medical aid benefits without resorting to a total cost package. Second, the opportunity to differentiate the organisation in the talent market by providing excellent medical aid benefits; is lost to conformity. Finally, the objectives of cost containment are better achieved by proactive management of all employment costs instead of only fixating on one or two guaranteed components.
4. Tax Efficiency
The opportunities to structure remuneration packages in a tax efficient manner have been systematically eroded in the past decade. A dangerous myth is that total cost packages are automatically more tax efficient than the traditional basic salary plus benefits model. Selling tax efficiency to win employee support is a reckless proposition as they discover the cracks when submitting their tax returns.
5. Internal Equity
It is no secret that organisations grapple with employees not being remunerated fairly in comparison to others. Achieving internal equity through a total cost package is an attractive sweetener. Or is it? Where inequities are present, a total package conversion will necessitate appropriate adjustments, at an additional cost. By simply fixing past inequities in this manner, the real culprits such as dysfunctional management practices, go unchecked. The prevalence of pay inequities among employees remunerated on a total cost package is thriving today, years after inception.
Flexibility is a widely publicised benefit that suffers from narrow application. In theory, the employee selects from a range of items, those appropriate for their lifestyle. The cost of the selected items is funded from the total cost package. The reality is that few organisations provide a range of different items to cater for the lifestyle needs of their employees. Even when several items are provided, in the absence of discounted rates or a tax benefit, there is little advantage in using them. Employees are also limited in their ability to make changes in their total cost packages for lifestyle developments during the year. They have to wait for organisational events such as the annual performance increase or react to market changes like interim medical aid hikes.
Establishing the value proposition of total cost packages is fraught with difficulty. While the traditional basic salary plus benefits model can achieve many of the benefits associated with total cost packages, the challenge is to remunerate employees with truly innovative offerings in future.
(People Dynamics, September 2005)