Unfortunately CTC packages remain a venue flytrap, it generates more “cost” to an employee than benefits. The burden falls on employees to properly understand CTC packages and the financial implications. If your company is planning to adopt CTC packages or a recruitment agent shows an impressive CTC offer, take care with the following:
1. Double check the terminology
In the absence of a legislated definition, the same structure has various names and meanings: total package, cost to company package, flexible compensation package and total cost of employment. It creates undue confusion for financial comparisons. I found a blue chip company that has separate definitions for total package and total cost to company. If an employee compared their total cost to company with external offers, it incorrectly came out higher due to the inclusion of long term incentives, abnormal employment costs and statutory employer contributions. Here is my definition: a CTC 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.
2. Tax Efficiency and Compliance
In the current tax dispensation, a CTC package does not automatically provide greater tax benefits or take home pay than a traditional remuneration package. A note for employers is that CTC package does not in itself; mean compliance with the Income Tax Act or provide a watertight defence in the event of an employees’ tax audit.
3. Best Practice
Some employers tell their staff; that total cost packages are used by all employers of choice and are best practice in SA. The realty is that total cost packages are not used by “all” employers. The term best practice is distorted to influence employee acceptance of CTC package conversions. From my research over the years, I find that CTC packages are far from best practice, it is a conceptually unsound from a reward and labour position.
4. Transfer of Economic Risk and Cost Control
Employers have transferred economic risks of benefit provision to employees through total cost packages, especially in the retirement and medical aid arena. Even if the employee is provided with additional remuneration upon conversion to a total cost package, it is unlikely to compensate for their additional benefit costs over their career. CTC packages have facilitated the move from defined benefit to defined contribution funds – many employees will only discover the financial shortfalls on retirement. If you work for an organisation that contributes an uncapped percentage towards your medical aid scheme, the introduction of a total cost package could leave you out to pocket by thousands of rand per annum.
5. Flexibility and Choice
Flexibility and choice is a widely marketed benefit that suffers from narrow application in CTC packages. Flexibility in a CTC package is usually linked to organisational events such as a performance increase or driven by market forces like changes in medical aid contributions. Don’t expect to make CTC package changes several times a year to suit your personal requirements. Beyond company contributions, guaranteed 13th cheque and a travel allowance, the package choices are limited or non-existent.
In 2008, the business and HR case for CTC packages is weak and unlikely to provide financial benefits for employees. Discerning employers should rather explore next generation reward models to attract and retain talent.
(Star Workplace, August 2008)
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